Partial prepayment (bank loan) - Worth it?

[Dancedesire]

Hi

i would like to seek some opinions here whether is it worthwhile to do a partial prepayment say 200k cash on my bank loan?

My loan is 880k ,interest rate at 3.6% . i have around 450k in cash and 200k OA.

is it wise to use 200k cash to bring down my monthly mortgage?

Any inputs will be helpful , thanks in advance!

 

[reddevil0728]

1. is there any penalty?

2. not withstanding the above, currently t-bill may still yield higher than 3.6%. so technically you are better off putting the money in t-bill. and delay the pay down

 

[Tp101s]

Cash is king, deploy them suitably! The current high lending rate shall past.

 

[dork32]

Cash is king, deploy them suitably! The current high lending rate shall past.

i think the other way. i may want to pay up loan now due to the high rate. when the rates are down, i go in and borrow again.

 

[dork32]

Hi

i would like to seek some opinions here whether is it worthwhile to do a partial prepayment say 200k cash on my bank loan?

My loan is 880k ,interest rate at 3.6% . i have around 450k in cash and 200k OA.

is it wise to use 200k cash to bring down my monthly mortgage?

Any inputs will be helpful , thanks in advance!

the question is what you are going to do with your 200k if you are not going to payup the loan?

 

[BBCWatcher]

i would like to seek some opinions here whether is it worthwhile to do a partial prepayment say 200k cash on my bank loan?
My loan is 880k ,interest rate at 3.6% . i have around 450k in cash and 200k OA.
is it wise to use 200k cash to bring down my monthly mortgage?

No, not when even T-bill rates are beating your mortgage rate. The most recent 6 month T-bill is yielding about 3.90% (EIR), and there's an auction every 2 weeks.

It'd be a little wiser to use OA dollars to reduce the size of your mortgage, but most OA dollars can buy T-bills, too.

Whether you actually buy T-bills or prudently invest in something else is a separate question, but since ~3.9% T-bills exist it would be financially foolish to pay down a 3.6% mortgage faster than required since buying T-bills is clearly better.

If your question is whether it makes sense to *lock* $880K or $680K for (say) 3 years at 3.6% — a mortgage refinancing question — then that's a different question. Is that your question?

i think the other way. i may want to pay up loan now due to the high rate. when the rates are down, i go in and borrow again.

Yeah, but not when there's a ~30 basis point spread in favor of T-bills. And you take a liquidity hit whenever you plow money into home equity, so that's clearly a negative. The liquidity hit is bigger with HDB leasehold equity. You cannot borrow against the equity in your HDB flat. But even with private sector homes there's a liquidity hit since you can't be sure a mortgage lender will let you tap equity in the future. The MAS's and lender's rules will still apply at that time.

 

[maumu]

the higher the interest rate, the more interest you're paying per month, which means the less you're paying off the principal amount of the loan. so in totality you're paying more interest.

you need to decide if the opportunity cost of not doing pre-payment allows you to earn more than the additional interest you're paying for the loan.

I did a full redemption lately because of this. so now I'm debt-freeeee...

to each his own.

 

[dork32]

Yeah, but not when there's a ~30 basis point spread in favor of T-bills. And you take a liquidity hit whenever you plow money into home equity, so that's clearly a negative. The liquidity hit is bigger with HDB leasehold equity. You cannot borrow against the equity in your HDB flat. But even with private sector homes there's a liquidity hit since you can't be sure a mortgage lender will let you tap equity in the future. The MAS's and lender's rules will still apply at that time.

i did mentioned it depends on what ts is doing with his money if he does not pay up. if it is tbills, then it may be ok. if it is dbs savings, then might as well as pay up

this guy has a 800k loan, it is quite unlikely that it is a hdb loan, unless he is one of those xiao kia that bought the 1.4 mil flat.

 

[Dancedesire]

i think the other way. i may want to pay up loan now due to the high rate. when the rates are down, i go in and borrow again.

thanks!

 

[Dancedesire]

the question is what you are going to do with your 200k if you are not going to payup the loan?

actually i may put into T bills but considering if i selling the property in say 2 years time, would it matters if i do prepayment or not?

 

[Dancedesire]

i did mentioned it depends on what ts is doing with his money if he does not pay up. if it is tbills, then it may be ok. if it is dbs savings, then might as well as pay up

this guy has a 800k loan, it is quite unlikely that it is a hdb loan, unless he is one of those xiao kia that bought the 1.4 mil flat.

haha ya

No, not when even T-bill rates are beating your mortgage rate. The most recent 6 month T-bill is yielding about 3.90% (EIR), and there's an auction every 2 weeks.

It'd be a little wiser to use OA dollars to reduce the size of your mortgage, but most OA dollars can buy T-bills, too.

Whether you actually buy T-bills or prudently invest in something else is a separate question, but since ~3.9% T-bills exist it would be financially foolish to pay down a 3.6% mortgage faster than required since buying T-bills is clearly better.

If your question is whether it makes sense to *lock* $880K or $680K for (say) 3 years at 3.6% — a mortgage refinancing question — then that's a different question. Is that your question?

Yeah, but not when there's a ~30 basis point spread in favor of T-bills. And you take a liquidity hit whenever you plow money into home equity, so that's clearly a negative. The liquidity hit is bigger with HDB leasehold equity. You cannot borrow against the equity in your HDB flat. But even with private sector homes there's a liquidity hit since you can't be sure a mortgage lender will let you tap equity in the future. The MAS's and lender's rules will still apply at that time.

ya spot on! i am that xiao kia lo lol..wifey wan balcony so bought a 1.2m private condo. House just TOP

 

[Dancedesire]

1. is there any penalty?

2. not withstanding the above, currently t-bill may still yield higher than 3.6%. so technically you are better of

no penalty

the question is what you are going to do with your 200k if you are not going to payup the loan?

they are sitting in my ocbc 360 bank collecting the bank interest

 

[Dancedesire]

the higher the interest rate, the more interest you're paying per month, which means the less you're paying off the principal amount of the loan. so in totality you're paying more interest.

you need to decide if the opportunity cost of not doing pre-payment allows you to earn more than the additional interest you're paying for the loan.

I did a full redemption lately because of this. so now I'm debt-freeeee...

to each his own.

nice!

 

[dork32]

no penalty

they are sitting in my ocbc 360 bank collecting the bank interest

if you are earning 4.6% in ocbc 360, what is the point of paying back a 3.6% loan?

 

[BBCWatcher]

actually i may put into T bills but considering if i selling the property in say 2 years time, would it matters if i do prepayment or not?

Sure, it still matters. If you get to enjoy as many as 2 years of an interest rate spread in your favor, that's better than 0 years.

if you are earning 4.6% in ocbc 360, what is the point of paying back a 3.6% loan?

That's a really great question!

But we really should thank all the premature pre-payers for helping to keep Singapore's mortgage interest rates as low as they are. I can't explain why people take dollars that could be earning ~3.9% in 6 month T-bills (for example) to pay off lower rate mortgages — or even 2.6% HDB loans — any faster than they need to be paid. But many people apparently do it, and with gusto too.

 

[sohguanh]

haha ya

ya spot on! i am that xiao kia lo lol..wifey wan balcony so bought a 1.2m private condo. House just TOP

With balcony cost 1.2m wow. Since it is private condo doubt you can use cpf to pay off. T-bill is a much attractive option for your cold hard cash which dork32 reader already shared. T-bill currently is about 3.5 - 4% so just do some simple maths. As for psychology reason like at night sleep keep thinking of the big loan affect your sleep, maybe some partial repayment is better. Sleep quite important for the health of a person.

 

[dork32]

With balcony cost 1.2m wow. Since it is private condo doubt you can use cpf to pay off. T-bill is a much attractive option for your cold hard cash which dork32 reader already shared. T-bill currently is about 3.5 - 4% so just do some simple maths. As for psychology reason like at night sleep keep thinking of the big loan affect your sleep, maybe some partial repayment is better. Sleep quite important for the health of a person.

for me it is not the saikorlogy. i sleep with even with very large loans. There are a lot of uncertainties in rates

eg, how fixed is your 3.6%. it is really fixed for 3 years, or is it pegged to some funny numbers. eg this month t bills 3.9 vs your 3.6%, you very happy. next month sibor or sora go up, you rate become 4.3%, then xiao liao.

even with fixed loan rates, there are risk. eg now 3.6% fixed for years. tbills is 3.9%. you so happy. 6 months later your interest is still 3.6%, but tbills become 3%. then jialat

there are quite a lot of risk involved. this is the thing that will cause me sleepless nites, not when i owe a lot of money but have the ability to pay up

 

[sohguanh]

there are quite a lot of risk involved. this is the thing that will cause me sleepless nites, not when i owe a lot of money but have the ability to pay up

I think the sentence highlighted in bold is key for many readers. As long as one can pay off when the times call for it it is ok. It is the uncertainty that happen such that one cannot pay off which make one sleepless. For my case is hdb loan and I worry kena retrench no more cpf come in and I need to pay up in cash which cause me to decide half way through do some partial repayment. Retrenchment is a buzz phrase nowadays in IT sector that I am in but heng ah I pay off liao a few years prior to this year.

 

[maumu]

everyone has a different utility of money. sometimes numbers like 3.xx% or 4.xx% only tell part of the story.

TS asked for opinion and honestly there's no one, true, correct answer. let TS decide himself what kind of plan he has to generate his own happiness.

 

[BBCWatcher]

I think the sentence highlighted in bold is key for many readers. As long as one can pay off when the times call for it it is ok. It is the uncertainty that happen such that one cannot pay off which make one sleepless. For my case is hdb loan and I worry kena retrench no more cpf come in and I need to pay up in cash which cause me to decide half way through do some partial repayment. Retrenchment is a buzz phrase nowadays in IT sector that I am in but heng ah I pay off liao a few years prior to this year.

That's exactly backwards.

If for example you have $50,000 in your Ordinary Account ($30,000 of which might be invested via the CPF Investment Scheme) and a $1,700/month HDB loan payment then you can pay your HDB loan for at least 29 months using nothing but your Ordinary Account dollars. In other words, you have 29 months of buffer. You have as many as 29 months to find a new job.

Alternatively you could take that $50,000 and pay off your 2.6% HDB loan faster than required. Then, if you're retrenched, you now have...ZERO months of buffer! You have to start paying cash right away. If you want to keep your HDB flat, at least.

Anything in between — taking $30,000, for example, and paying off your low cost HDB loan faster than required — means you have fewer than 29 months to find a new job. Otherwise you have to dip into cash that much sooner.

Oh, but it gets worse. If you die too soon and have the Home Protection Scheme (HPS) coverage then congratulations, your survivors are poorer by whatever amount you used to pay your HDB loan faster than required. That's because the Home Protection Scheme would've paid off whatever the remaining loan is (your share of it). But no, you retired that portion of the loan, so no HPS payout for your survivors for that portion.

So how well are you sleeping now?