What is the settlement of a loan?

Settling a loan is very important to owning your property someday

The settlement of a loan is the act of paying back the amount of money owed to the lender. If you've ever been out on the town and had to settle your tab before leaving an establishment, you're familiar with the notion. This makes sense, because a loan settlement statement details how you are expected to pay back your debt to the lender.

In terms of purchasing property, the details of a loan will usually be delivered to the borrower by the bank (or other lending institution) in a loan settlement statement.

What is a loan settlement statement?

A loan settlement statement is the document that describes the amount of a loan, typically for a mortgage, given to the borrower once the loan has been settled. In addition to the amount, the settlement statement will also contain the frequency of installments expected from the lender in regards to repayment.

It will be written up by the lender, usually a bank but possibly another lending party, at the close of settlement.

Is a loan settlement statement different from a normal settlement statement?

Quick answer: yes. It's not uncommon to mix the two up, though, because a "settlement statement" is another document that's involved in buying a home. So how do you keep track of which one is which?

A settlement statement explains and accounts for all fees and rate adjustments like stamp duty, government levies, or water and council rates. In other words, it's an itemized list of every financial transaction involved in closing on a house from both the buyer and the seller.

A loan settlement statement, meanwhile, is a document detailing how much money you owe and how the bank (or another lending organization) expects you to pay the money back.

That's the difference between the two. The first is a list of expenses from buyers and sellers in the closing process, while the other details the specifics of your loan/mortgage.

What does a loan settlement statement look like?

As an example, let's say you were approved for a mortgage valued at $200,000 to be paid back over 10 years with a 4% interest rate for the purchase of a property worth $235,000. Now let's say that you and your lender agreed that you would make monthly payments on your loan.

All of this information will be detailed in the final loan settlement statement, as well as the repayment details.

It will detail the loan in a way that might look something like this: "Jane, the buyer, has entered into a contract with John, the seller, for the purchase of John's property on this date. The purchase price was $235,000, and Jane will be receiving a loan for $200,000, or 85% of the purchase price, to be repaid in monthly installments of 2,024.90 over the ten-year duration of the loan at 4% interest, for a total of $242,988.00. The rest of the purchase price was paid for in a deposit by Jane to the amount of $35,000, and will not be included in the loan."

How did the lender get to $242,988? Well, a 4% interest rate on this loan broken into monthly repayments would result in a monthly bill of $2,024.90 – evenly dividing the $200,000 principal as well as the interest percentage over the span of the loan, according to our home loan calculator.

It's also worth noting that, if Jane paid her mortgage back in weekly installments, rather than monthly, she could be saving just over $250 off of the total interest. Not a huge amount of money compared to the total value of the loan (or the property, for that matter), but certainly a nice amount to not have to pay back.

When will I receive my loan settlement statement?

You will receive your loan settlement statement at closing, when all parties involved in the sale are signing forms and making sure everything is in order. It is in the lender's best interest to give you the settlement statement as soon as possible, because that way they will know you are officially aware of the terms and conditions of your loan repayment.

Is there any downside to settling a loan early?

On the surface, paying off your loan before the terms agreed to seems like an obvious decision. If you're looking at a mortgage, it's likely that this is going to be the largest debt that you encounter in your lifetime, and the faster you settle your debt, the less interest you'll pay. Seems like a clear-cut decision, right?

Not necessarily. In this case, it's very important to read the contract: Your lender may not have allowed you the option of early repayment in the contract, so even if you have the ways or means of settling early, you may not be able to.

Alternatively, you may find that a lender will allow you to settle your loan early but they will charge you a fee, sometimes a significant one.

Why would lenders do this? Well, whenever you enter into a loan, you are almost always going to pay interest on the amount you've borrowed – otherwise the lender wouldn't make any money from the loan, which, unless you're borrowing from "the bank of Mum and Dad", is not why they loaned you the money in the first place.

If you've signed a ten year loan with a bank, they were banking (pardon the pun) on having ten years of monthly payments and the interest that went with them. If you pay it off all at once, their revenue source – your interest payments – dries up.

All of this information will be detailed in the terms and conditions of your mortgage, but because many of these documents are written in very specific language that can be difficult to decipher, you can call your lender directly if you are unable to find it in the contract.

What about a property settlement statement?

A property settlement statement is a third thing entirely: an agreement between divorcing spouses that divides their assets between both parties.

While it sounds similar to the other settlement-related terms, it does not have to do with purchasing property.