Question

Loan repayments from mortgages do not increase as the wage increases in growth rates. Why do businesses in the mortgage market not increase their loan repayments to the growth rates of wages where the proportion of the wage to monthly repayment stays the same? And what are the advantages of doing this method?

Answer 1

If loan repayments are linked to wages, the initial amount of loan repayment will be lesser and hence business in mortgage markets do not want this method as it will decrease the initial payments and make the later payments bigger, thus a bigger amount of the mortgage balance has to be recovered at the end which increases the risk of mortgages in terms of quick recovery, volatility in collateral and most of all increased paperwork and compliance to check whether the wages have increased or not. So, these are the reasons , mortgage business houses do not link payments to wage growth rates.

The advantage of this will be mostly to the loan taker, as there will be less burden initially when the wages are low and higher payments when the wages are more, So the loan taker will find it easier to repay the loan, the demand of loan may increase with more people opting for such loans.