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Marksman's Investment Corner is currently on a short break - expect activities to pick up from July 2018 onwards!

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Saturday, March 31, 2018

Effect of Compounding Part 2 - Early Repayment for a HDB Housing Loan

In a previous post I mentioned I will revisit the effect of repaying HDB Housing Loan earlier (link here).

I believe thoughts of repaying the HDB Loan must have crossed the minds of some homeowners out there to finish paying off the mortgage earlier with the goal of becoming debt-free. This post will explore the example of doing early repayment for a $300,000 HDB Housing Loan. Let's call this homeowner with this loan Mr A.



If we recall the formula of compounding:
  • Paying off a $300,000 HDB Housing Loan (prevailing interest rate of 0.1% above CPF-OA Interest, which is 2.6% as of this post) means you will pay a total of ~$413,500. This means you will be paying ~38% worth of interest over the course of 25 years. Because you are regularly paying off the mortgage periodically, the effect of compounding is reduced and has the effect of compounding for 12.5 years instead of 25 years.
Mr A is paying off his mortgage of ~$1378 monthly.

At the end of his first year of paying off his HDB Housing Loan, Mr A has received a handsome amount of $10,000 for performance bonus at work. Keen on being debt-free earlier, he has decided to use this proceed to do an early repayment of his housing loan.

Using the compounding formula, paying off $10,000 in his second year will have the effect of paying off ~$18,000 on his mortgage. $18,000 divided by $1378 means he has shaved 13 months off!

Consequently, the later you do an early repayment, the less effect it will have on your overall mortgage.

Year - Year of mortgage the early repayment is done.
10K worth - Amount the $10,000 is equivalent to


Years
10K worth
2
18046.35
3
17589.03
4
17143.31
5
16708.88
6
16285.45
7
15872.76
8
15470.53
9
15078.49
10
14696.38
11
14323.96
12
13960.97
13
13607.19
14
13262.36
15
12926.28
16
12598.71
17
12279.45
18
11968.27
19
11664.98
20
11369.38
21
11081.27
22
10800.46
23
10526.76
24
10260
25
10000

Homeowners (both current and prospective), if you are considering early repayment, do consider the following:
  • HDB Housing Loan: There is a minimum sum ($5000) and advance notice required (1 month).
  • Bank Loan: Likely you will need to pay a penalty sum unless the loan has some terms and conditions that waives this off. Check if the penalty exists for your planned bank loan (Mr 15HWW shared about this as well.)
  • It is also an option to use the sum intended for early repayment to do investment to get a higher return instead.
Thanks for reading!

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