Under the instalment plan for the property loan, what does it mean if interest is computed on a monthly-reducing basis?

Repayment of a housing loan is usually made in monthly repayment instalments. Each instalment consists of two parts: i) principal repayment and ii) interest payment.

The instalment depends on:

  • loan principal
  • loan tenure
  • interest rate
  • how interest is computed

The common method of interest computation is on the monthly-reducing basis. This means:

  • The principal outstanding is reduced by the principal amount repaid every month
  • The interest for the following month is computed on the reduced principal outstanding at the start of each month
  • The interest rate charged for the month is the actual cost of using the housing loan in that month

What is the instalment payable each month or each year? How much goes into paying interest and how much into paying the principal? Can I get a loan repayment schedule for this loan?

The Residential Property Loan Fact Sheet provided by the bank during the loan application process will provide details on:

  • Monthly principal and interest repayment
  • Yearly principal and interest repayment
  • Estimatedtotalrepayment(Principal+Interest) during the entire loan period
  • Dollar amount you will pay for every $1 borrowed
  • Increases in monthly repayment instalment if interest rates were to increase
  • You can also refer to the loan repayment schedule (also known as an amortisation table) for more details. Banks will provide such a schedule for the housing loans they offer in hard copy or soft copy on the bank’s website

This repayment schedule will indicate:

(a) Your monthly repayment instalments throughout the housing loan tenure. Use this to assess whether you can afford to take up the housing loan.

(b) How much of the monthly repayment instalment goes towards paying the principal and how much towards paying interest, and the total amount of interest payable for the entire housing loan tenure. The monthly repayment instalment for a housing loan with a longer tenure will be smaller than one with a shorter tenure. However, you pay more interest on a housing loan with a longer tenure or bigger principal.

(c) When the housing loan will be paid off. If you are using your CPF savings to pay your housing loan, it is prudent to pay off your loan by the CPF Withdrawal Age of 55 due to reduced CPF contribution rates after 55.

When considering different loan packages, always compare their repayment schedules. Check the total amount of interest payable during the initial years where promotional rates or fixed rates are offered, and the total interest payable over the tenure of the housing loan.

Repayment schedules:

  • Are computed based on prevailing interest rates, assumed dates of loan disbursement(s), outstanding balances and loan tenure; and
  • Will be revised if there are changes to your loan, including changes in applicable interest rates or loan tenure or both. Ask your bank for an updated repayment schedule whenever there are changes to your housing loan

If you wish to discuss with your bank the options for reducing the amount of interest payable or paying off the housing loan earlier, you may consider:

  • Shortening the loan tenure
  • Increasing your monthly repayment instalments
  • Reducing the loan quantum by paying off part or all of it early

Do check if there are any charges or penalties for any of the above.

Will I be provided with statements of my housing loan account?

The bank will provide you with an annual statement of your housing loan, detailing transactions like:

  • Interest charges
  • Monthly repayment instalments paid
  • Prepayments made
  • Total interest paid during the year

Banks may also provide interim statements upon request, although some may charge for the service.

Can I change the monthly repayment instalment amount during the tenure of the housing loan? Would I need to pay any fees or charges? What are the terms and conditions?

Some housing loans offer you the flexibility to change the monthly repayment instalment amount during the loan tenure. However, do not be attracted by a loan package merely because of repayment flexibility. Ask your bank:

  • if there are any fees or charges for making a change
  • the minimum notice period needed before a change can be effected
  • the minimum repayment amount acceptable

Although these facts are usually set out in the housing loan agreement, it is best to find out beforehand.

Will I need to declare the discount, rebate or any other benefit offered by the developer or any other party?

You must declare all discounts, rebates or any other benefits that you receive from the developer or any other party that has the effect of reducing the purchase price of a property, regardless of when you receive the discount, rebate or any other benefit. Examples are furniture vouchers and the payment of stamp duties by the developers on your behalf.

What benefits does this loan provide? Must I repay these benefits if I pay off my loan earlier or refinance it?

The housing loan may come with other benefits like:

  • Legal fee subsidy
  • Valuation fee subsidy
  • Free fire insurance for a limited period

However, if these benefits are given as part of a housing loan package, a bank is required to deduct such benefits mentioned above from the purchase price before computing the loan amount that you qualify for.

It is worth noting, however, that you may have to repay all or some of these benefits if you repay the entire housing loan before the period stated in the bank’s terms and conditions. Read the loan terms and conditions carefully to understand how this works for the loan you are considering.

Will I be better off if I use the services of the law firm or insurance company recommended by the bank, even if no subsidy is offered?

Generally, you may benefit from economies of scale and pay lower charges if you use the lawyer or insurer recommended by the lending bank. You may wish to compare fees or premiums charged by other law firms or insurance companies before making a decision.

You may seek approval from your bank to use a lawyer who is not on the bank’s panel and note that the legal fees may be higher. Most banks charge an administration fee for insurance taken from an insurance company other than the one recommended by your bank.

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