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What is housing loan amortization?

Most car loans are based on simple interest (Loan Amount x Interest Rate x Loan Tenure), which means even if you made an early full loan redemption, you still pay the same amount of interest to the lender.  On the other hand, Amortized loan such as a mortgage loan, interest is charged till the point of loan redemption. If you have a 30 years mortgage loan, and you pay it off in 10 years, you only pay 10 years of interest.

Now let’s look more closely at how a mortgage loan is being amortized. Loan Amount $500,000, Interest 1.3%, Loan tenure 30 years

MonthPrincipalMonthly InstalmentPaid to PrincipalPaid to Lender (Interest)Principal Left
1$500,000.00$1,678.02$1,136.36
$541.67
$498,863.64
2$498,863.64$1,678.02$1,137.59
$540.44
$497,726.05
3$497,726.05
$1,678.02$1,138.82
$539.20
$496,587.23
4$496,587.23$1,678.02$1,140.06
$537.97
$495,447.18

As you can see, the monthly instalment is split in principal repayment and interest repayment. On month 2, what you owed is slightly lesser, and interest is being charged based on the lesser principal amount. While instalment amount remains the same, more is paid towards the principal amount.

When interest rate changes, the proportion of the principal and interest changes as well.


For those that are on HDB loan, now you know how much of your installment goes towards the interest.

Does taking a shorter loan tenure saves on interest?

The answer is yes.

Lets look at the amortization table. Same $500,000 loan amount, interest 1.3% and 20 years loan tenure.

MonthPrincipalMonthly InstalmentPaid to PrincipalPaid to Lender (Interest)Principal Left
1$500,000.00$2367.01$1,825.34
$541.67
$498,174.66
2$498,174.66$2367.01$1,827.32
$539.69
$496,347.33
3$496,347.33$2367.01$1,829.30
$537.71
$494,518.03
4$494,518.03
$2367.01$1,831.28
$535.73
$492,686.75

The interest portion is the same as the 30 years loan, only the principal repayment is higher. This means that whatever loan tenure you chose, the interest paid is the same. You pay 10 years less interest compared to a 30 years loan tenure. So yes, you do save on interest as the loan ends earlier, but at the same time, monthly instalment increases by $688.99 per month. If your total household income is like $7,000, the housing loan instalment makes up 33% of household income. If one loses his or her job or interest rate increases (e.g 2% interest, monthly instalment is $2529.42) or both, one may have a hard time servicing the loan. You will not want to get caught in such situations especially during economic downturn. You will need to plan your cashflow properly if you intend to go for shorter loan tenure.

Here are some tips to save on interest for your mortgage loan.

  1. The lesser loan you have, the lesser interest you pay
  2. The faster you pay off the loan, the lesser interest you pay
  3. The lower interest you get, the lesser interest you pay

Here are the best practices for mortgage loans.

Take the longest loan tenure possible

This will get you the lowest monthly installment amount for your desired loan amount. It will much more manageable if interest rates goes up, or, unforeseen events happened. For this method to work, you will need to make as much partial payment as you can. An example is like $24,000 every 3 years or so (based on the $500,000 loan example).  This way you can have a better cash flow, and in unforeseen events where you suddenly need money, there is this extra amount of money to use. If things are all good, you can proceed to pay down the loan. If you are not that disciplined enough to put aside a sum of money every month for the partial payment, then its better for you to go for a shorter tenure.

How does make partial payment impact your mortgage loan?

Using the above $500,000 loan example, assuming interest rate remains at 1.3% every year. After 6 years, one has saved $48,000.

After 6 years of a 30 years loan tenure, outstanding loan amount is $414,954.60. If you make a partial payment of $48,000 at this point, your outstanding loan becomes $366,954.60.

Outstanding loanMonthly InstalmentPaid to Lender (Interest)
$414,954.60$1,678.02
$541.67
$366,954.60$1,483.92$397.53

There is an immediate reduction of $144.14 per month ($1729.68 a year) in interest for just paying off $48,000. Assuming interest rate did not change, $144.14 x 12 months x 24 years = $41,512.32. Although interest rate never stays the same throughout the entire loan entire, the concept of making partial payment helps you save on interest especially when interest rate goes up.

If interest rate increases to 2%

Loan AmountMonthly InstallmentPaid to Lender (Interest)
$414,954.60$1,815.35$691.59
$366,954.60$1,605.35$611.59

The difference in interest is $80 per month ($720 a year). Although $720 a year is not much but you still save on interest.

Before you make any partial payments, do check with the bank if you are still within lock-in period.

The most ideal scenario is to have shorter tenure and make as much partial payments as you can. Do make sure you plan your cash flow ahead and anticipate events such as loss of job, retrenchment, change to lower income jobs etc.

Email us at enquiries@mymortgage.sg if you have any questions or need some consulting.

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