Any homeowners would know that home loans are the number one killer to deplete our salary and savings. For many of us, we would have 30% / 60% of our salary (maximum cap due to TDSR for HDB / private property) go into servicing the home loan. However, not all of the money actually goes into paying off the loan.

Our monthly home loan installment goes into servicing the interest before it goes into paying off a part of our loan. Undoubtedly, many of us probably enjoyed lower home loan interest rates due to Covid a couple years back, but now that the Covid effect on the economy is very much muted, home loan interest have been rapidly rising.

In fact, home loan interest generally creeped up from 1.x% to 4.x% in just a couple of months. Our home loan interest more than doubled after the lock in period, and our monthly installment also shot up like crazy. After waiting for the dust to settle down, it is time for us to consider whether we should refinance.

After some serious calculations and discussions, we decided to make a partial prepayment for our home loan instead of refinancing our loan. Here’s why.

Bulk of installment goes to paying interest

After sitting on this for a while, we decided to calculate how much we were paying in interest over the lifespan of our loan. It is in fact, not pretty. By making some early prepayment, our interest payment will significantly be reduced.

To give you a clearer picture, this is a quick calculation of how much you save if you choose to make partial prepayment to your loan.

Assumptions made:

• Initial Home Loan = $500k
• Interest = 4%
• Partial Payment = $10k
• Loan Tenure = 25 years

At 4% interest, your current installment would stand at $2639.18. The total interest paid over 25 years would be $291,755.

If we make a $10k partial prepayment, you will reduce your installment by $53 to $2586.40. The total interest paid over 25 years would be $285,920. This means that you are saving close to $6k in interest over the 25 years.

Do not want a lock in

This was a consideration that we mulled over when we were discussing if we wanted to refinance our home loan. We could significantly reduce our current home loan interest given that the average home loan interest offered by banks has stabilized and settled for a manageable interest rate.

Ultimately, refinancing means that we would likely have a lock in period whereby, there would be a penalty if we choose to make more early prepayment. We opt to keep the flexibility to prepay our loan whenever we have the ability to do so. This makes more sense to us (for now!!) and it may change as our situation and thinking change.

Peace of mind

It might sound a little cliché, but after having our little one, we decided to live a more simple life. Previously, we were working very hard in our respective careers so that we could climb the career ladder, make more money, and eventually get an investment property and what-not. Now that we have our little one, and one of us have stopped working, our priorities have shifted.

We did not want to be put in a situation where we constantly worry about money, and the largest debt we have right now is the roof above us. If we can make small early prepayments the earliest we can, our monthly installment will reduces, which will slowly reduce our future expenses. That way, when we are older, we would not be panicking over the installments if we have an emergency that will eat a huge chunk of our savings.

Last Updated: 25 Jun 2024