Home loans and mortgages are never easy to understand. Even the monthly statements provided are terribly complicated, however, you should always take some time to understand and analyse your monthly statements to know how your loan is being managed by the bank. Read on to understand more about advanced payments and why they do not help in reducing your principal amounts.

Mortgage Advanced Payments Do Not Reduce Loan Principal or Interest

I always thought that additional payments directly to your loan account, above the amount set by the bank, will automatically go towards reducing your principal and interest payments. However, I recently discovered that the additional payments I was making was actually going towards a “suspense account” held by the bank which they use as a buffer for any late payments.

My principal and interest were not getting reduced at all!

The banks will often tell you that it will reduce your loan tenure over time. However, your loan will only be reduced towards the end of its tenure with the excess money you had paid over the years from the “suspense account”. Unfortunately, the end of the tenure is when the interest is lowest and hence, you would not have saved anything at all.

So, do be careful of advanced payments to your loan account and do not make the mistake of thinking that your principal and interest payments will be reduced.