My first home loan because there will be some more in the future. In God’s time.
Just want to share the good news. Fully paid my first home loan this week. Got it in 2010, originally for 15 years tenor, done in 6 years. It’s just a humble abode though so loan amount is not too big to begin with. Part of the plan. Still, happy graduation! Thank you Lord!
Shared previously 2 articles on partial prepayment (view first one here, second one here). Did a third advance payment, this time to fully pay the outstanding balance and pre-terminate the home loan. Not because I am rich like that (I had lots of blessings and assistance), but because (1) it made sense from my overall cash management and medium-term cash flow perspective, (2) I wanted to save as much interest expense as possible, (3) another home loan is coming before year-end, this time for Grace.
Consider below table summarizing a 3 year debt-repayment journey. Again note that these are not actual amounts, but scaled down amounts for better presentation (round numbers). But note too that the fees and saved interest have been scaled down too, so the percentage of fees and charges remained the same.
Amount Prepaid [a]
This is the amount that went completely to principal balance. In a normal loan amortization, part of the monthly payment goes to principal and part to interest. The breakdown between principal and interest varies, which you can see in the amortization table that should have been provided to you. In this case of partial or full pretermination, 100% of the amount prepaid went to principal.
Prepayment Fees [b]
This will be service charge, processing fee, breakfunding cost, accrued interest (if prepayment does not coincide with monthly due date) etc. For some lenders, you can minimize this cost if you time your prepayment with your anniversary date or your repricing date (which only happens every x years). The fees charged during my 2016 full pre-termination is slightly bigger as this also includes some more fees needed for the documentation (GRT, notarial fee, cancellation of mortgage, certificate of full payment etc). Adding up [a + b] will yield to total amount I paid for during each exercise.
Avoided Interest Expense [c]
Derived as how much interest I will pay to get from principal amount X to principal amount Y, if I just kept on paying the monthly amortization. But this time, I got much faster from principal X to Y because I prepaid so I skipped much of the interest payments along the way.
For 2016, that would be how much interest I will pay to bring the 360K balance down to zero balance, and it came out as 37.5K. Note that saved interest expense is much smaller now (compared to 2013/ 2014) since as you go further into your loan tenor, as the loan ages, the portion that goes to principal is much higher while the portion that goes to interest is much lower. Again you can see this in your loan amortization schedule.
Net Savings [c-b]
Derived by subtracting avoided interest expense and prepayment fees. Even if I was able to save on interest, I still had to shell out some amount to pay for the fees. The net of this two will be how much I saved for doing the prepayment (2013-2014) and pre-termination (2016) exercises. Which still comes out as positive so there are still monetary savings. Note that I did not include here savings from the annual fire insurance and mortgage redemption insurance (MRI) that I also have to pay every year that the loan is outstanding. Since I’m now fully paid, no need to pay MRI moving forward (another save!), but I still plan to personally avail of fire insurance.
PHP106,000, 42 months
I saved a running total of 106,000 for the 3 exercises I did. I will no longer bug you with present value, future value computations to keep it simple. I avoided 133K of interest expense but paid 27.5K prepayment fees. For me, not a bad trade off. Plus the fact that I shortened my home loan repayment by 42 months (3 ½ years). Yes 42 months. Juan can already grow his investments so much in 42 months instead of using that amount to repay a home loan.
Cancellation of Annotation
By the way, was expecting that the lending bank will be the one to process this (remove in TCT the annotation or their claim) but it turns out, the borrower/ owner (in this case me) will be the one to process this. Haven’t tried this yet, but according to lending bank, the requirements are:
- Original TCT/ CCT (to be released by bank once fully paid)
- Cancellation of Mortgage (to be provided by lender after full payment)
- Payment of fees (a percentage of loan amount, which I don’t know yet).
- Real estate tax receipts (updated payments, bring this just to be sure), and
- Tax declaration.
Will keep you posted once I have the time to process the cancellation of annotation.
Forever thankful of course to God almighty for giving me the strength, the time and resources, the inclination to be financially literate. And now a fully paid home! Of course I also had lots of help. Special thanks to my past and present employers. To my ever supportive family and friends. To my various investments and side-businesses that kept my finances afloat.
Of course to my charitable-Ilocana wife who also gave me so much moral and financial support (part of the amount I used to fully pay was borrowed from her and from our conjugal fund at zero interest). So technically I was moving from 9% mortgage interest to 0% spouse interest (and a steak dinner treat). In fact she was more excited than I am to finally finish a home loan. I guess that’s love.
Aside from painfully saving up my bonuses from 2015 to 2016 (instead of shopping este investing it) I had to choose to repay my home loan as soon as possible. Why the hurry? Again because I had to finish this home loan asap, so I can focus on the upcoming condominium loan. And I don’t want to keep my loans for too long, as I previously shared, longer is not always better.
During the first 2 prepayments, a valid comment I got was that there are opportunity costs to what I did. Indeed! I could have invested the 100K or even the 360K in stocks or businesses and just keep on paying the 9% annual interest of the mortgage. Especially if I have confidence that I can beat the 9% per annum return, if I decided to invest instead of repay debt. This is actually a good point for Juan to consider.
Which made me realize that in every financial decision that we make, ROI is not the sole consideration. A debt is a debt, and personally, having a big debt feels heavier than having minimal savings. It’s an eyesore in my personal SALN.
In deciding to prepay, I had to consider the future cash flows I will get, the timing of other upcoming loans / expenses, the investment opportunities out there, current market sentiment, etc. Will I be willing to risk 360K in stocks or bonds, or be conservative, be sure and fully pay a house where my family lives, while I still have the amount? Especially in the Philippine where home ownership is very difficult yet an aspiration for every Juan. So I had to choose to secure the debt repayment, to finish it, instead of risking it.
In hindsight, I could have grown my 100K prepaid amount to about +20% to +30% when PSEi hit bottom at late 2013 to peak at mid-2015, but then again this is in hindsight. We can never tell while we’re at it. But I guess, at this stage of my life, I see debt repayment as more urgent than building wealth because this house is where my family lives (parents and brother). Plus, we still have plans to get another house and lot, for my own future family (that we’re starting with my charitable Ilocana), hence the urgency. Lastly, I feel like I’m overexposed to stocks and managed funds already at this point. Lol!
So of course I leave it up to you guys to choose how to best handle your finances, since each investment/ debt-repayment option has it merits. I’m just here to give you options, ideas. Your money, your call, since you alone can understand the whole situation. For those who have mortgage loans, consider partial prepayment always. May we all have richer lives!
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