Switching banks or mortgage providers during the life of your mortgage doesn't directly impact the overall amortization schedule of your loan. The amortization schedule is a predefined plan that outlines how your payments are divided between interest and principal over the life of the loan.
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“Dumb question but this is something that has always confused me. Say I’m in the 3rd year of paying a 30-year mortgage. Most of my payments would go towards paying interest instead of principal. If I then change bank/provider on the 4th or 5th year, does it have any effect to the amortization ? Or does it just continue whatever interest vs principal payment proportion as before ?“
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As the cliche goes, there is no such thing as a dumb question. Let’s delve into how changing banks affects your mortgage.
Switching banks or mortgage providers during the life of your mortgage doesn’t directly impact the overall amortization schedule of your loan. The amortization schedule is a predefined plan that outlines how your payments are divided between interest and principal over the life of the loan.
Here’s how it typically works
Early Payments: In the early years of a 30-year mortgage, a large portion of your monthly payment goes towards paying interest, and only a relatively small amount goes towards the principal. This is because the interest is calculated based on the outstanding balance, which is highest at the beginning of the loan.
Later Payments: As you make more payments, your loan balance decreases, and a larger portion of your monthly payment goes towards reducing the principal. Over time, you pay less interest and more principal with each payment.
When you switch banks or mortgage providers, the new bank will usually calculate the remaining balance on your mortgage based on your existing amortization schedule. They will then continue the same amortization schedule, ensuring that your remaining payments are divided between interest and principal in the same way as before. This is why switching banks doesn’t directly affect the interest and principal payments proportion.
However, there are a few things to keep in mind.
Closing Costs: When you switch banks, you may incur closing costs, which can affect the overall cost of your mortgage. These costs may include application fees, appraisal fees, and other expenses associated with refinancing or transferring your mortgage.
Interest Rate: If you’re switching banks to get a lower interest rate, your monthly payments may decrease, impacting the amount going towards interest and principal. A lower interest rate means less interest and more of your payment goes towards the principal.
Term Adjustment: If you switch to a mortgage with a different term (e.g., from a 30-year to a 15-year mortgage), it will significantly change the amortization schedule. With a shorter-term mortgage, a larger portion of your payment goes toward the principal from the beginning.
In summary, while switching banks or providers doesn’t directly change the amortization schedule, it can impact your mortgage based on factors like closing costs, interest rate changes, or adjustments to the mortgage term. It’s essential to consider these factors carefully before deciding to switch providers.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The information in this post is only general in nature and is not personalised financial advice. Please contact us if you want financial advice.
