Manila, Philippines
geri@investmoney.com.ph

Oops I Did It Again (Home Loan Partial Prepayment)

Share this #GYMBFF article:

Oops I did it again.

Earlier this year, I shared about how I used my Christmas bonus (and some savings) last Dec2013 to partially prepay my home loan. Well time flies and yours truly was blessed enough to receive a Christmas bonus once more. So as planned, I used parts of it to once again partially prepay my home loan.

Park Place Expensive Real Estate Monopol by Philip Taylor PT, on Flickr

Read on for the details.

Last year, for a sample figure of PHP100K, I was able to save 44.5K worth of interest payments and accelerated my home loan balance for 8 months (compared to just paying the monthly amortization, which I still do by the way).

This year, let’s say I once again prepaid my home loan an amount of PHP100K (adjusted for illustration purposes and for consistency).

The breakfunding cost and processing fee now is lower compared to last year since the sum of this is usually a function of the loan balance, which is comparably smaller now.

Likewise, as the loan ages, a bigger portion of the amortization goes to principal, as such the interest saved this year is slightly lower compared to last year but it is not a bad thing because it means more of what I paid went to actually reducing the loan balance rather than paying interest. Hence, time saved this year is actually longer than last year. Table below shows the summary:

2014PartialPrepayment_zps8a9b54e5.jpg

Cumulatively, I have spent PHP200K to partially prepay my home loan. Could have considered other investment options, yes, but I can’t say no to an easy outright return of PHP84.5K. As they say a peso saved is a peso earned so for me, I earned PHP84.5K in the process.

Further, I got to accelerate my balance for 17 months. That means I will graduate from my loan almost a year and a half earlier and spend my money on other investments instead. That’s a lot of time to make other investments grow coming from freed up capital.

How about you? What did you buy for yourself this Christmas?

Photo: Parkplace Expensive Real Estate Monopoly by  Philip Taylor PT 

Creative Commons Creative Commons Attribution 2.0 Generic License

Advertisements
Advertisements
Share this #GYMBFF article:

 Filipino Personal Finance

11 Responses

  1. Joey says:

    Thank you so much Sir, for the additional information. It became clear to me now why they are requiring those new documentations and additional fees. It didn’t make sense to me at first, but now I understand. I might just do what you did which is to prepay in bulk every six months.

    Thanks again and more power to you and your blog.

  2. Anonymous says:

    Just sharing an actual reply from a bank when I inquired about partial loan repayment. It’s actually not an easy task to comply with all these requirements. To avoid hassle (since I am not in the Philippines) is option 1 which is the automatic application of partial payment. May savings pa rin naman sa in interest pero not as much kung yung desired option ko ang gagawin which is term shortening (that means I will keep on paying the original amount of monthly amortization.

    “Automatic application of partial payment is to revise your monthly
    amortization amount. Revised Amortization Schedule will be delivered to
    mailing address or fax within 10-15 banking days after partial payment has
    been posted. Since you mentioned that you wish to retain your currently
    monthly amortization amount, this would result to term shortening.

    If you wish to request for term shortening, you will need to submit the
    following either to the branch or to us via email:

    Completely filled-out CRF signed by ALL Borrowers / Letter of Request
    (signed by ALL Borrowers). Use the “Others” portion in CRF and indicate the
    purpose of request.
    Photocopy of valid ID with signature
    Current year Real Estate Tax Receipts on Land and Improvements (RETR)
    Updated Tax Declaration on Land and Improvements (if applicable)
    Latest Real Estate Tax Receipt
    Tax Declaration (If applicable)
    Latest Proof of Income

    Please be advised of the following guidelines in relation to loan term
    shortening request:

    MRI and Fire Insurance premium payment should be updated.
    The bank may still require submission of additional documentary
    requirements during the evaluation period.
    Pay the appropriate fees and submit Official Receipt (to be paid after
    request is approved).
    a. Amendment Fee – P3,000
    b. Processing Fee – P3,000
    c. Documentary Stamps (Outstanding Balance/P200)
    Current loan term and monthly amortization will still be applied until
    request is approved and implemented.”

    • Admin says:

      Thanks for sharing this!

    • Admin says:

      Thanks for sharing this! Very informative. In my partial prepayment I did not request for a shorter tenor so they kept my tenor but lower amort. But every 6 months or so I prepaid in bulk. That’s how i was able to effectively finish the loan much earlier.

      Shortening the tenor will mean the loan contract you signed with then previously that was notarized and submitted to registry of deeds will have to be amended. As such all the documentations and fees because it will look like a new and different loan altogther.

  3. Rin says:

    Hi, I’m an ofw but servicing a home loan in the Philippines. The recent rise in interest rate is really a pain. I’m looking now at the new monthly schedule of payments & it seems that more is going into interest payments than the actual loan amount. Aside from prepaying like what you did in this article, what other options do you know of? I was thinking along the lines of transferring the loan to another bank or changing to a floating loan.

    • Admin says:

      Hi. At the early stages of the loan, the interest portion will really be bigger than the principal portion but this changes as the loan progresses. Aside from prepay, getting the shortest tenor that you can service will ensure that the principal portion will be bigger than the interest the soonest possible time. You may download a loan calculator app to check this. Transferring the loan will entail costs and it means you go back to amortization 1 so the interest will again be bigger than principal at that point. So you need to check the fees and charges and the total interest you will pay and compare it to your existing one. The key really is lowest rate, shortest tenor then prepay along the way. Mortgage loans are really expensive especially if 15yrs or longer. Hope this helps.

  4. Geri says:

    We see the point in his comment, especially viewing it in a purely investment standpoint of returns on investment. I leave it to you guys to ponder on this. I just replied to him that in a vaccuum yes that might be a better option, but in real life we should also consider cash flows, and getting an opportunity to fully pay your home (where your family lives), and the timing since it many instances to prepay at smaller amounts (200k is just the cumulative balance) etc. And also the confidence level in growing the money, as pointed out in earlier comments. But both are good options, depending on Juan's specific situation.

  5. Geri says:

    Interesing comment I got today on our FB page about this article (verbatim): “There are opportunity costs with what you did. You are getting a one-time savings of P84.5K over a span of 15 or 20 years by reducing leverage at a cost of P200K today. But the same 200K could have easily doubled itself passively in less than a decade.

  6. Rae says:

    Nice, my house loan starts on September 2015 and I was wondering about this. With my level of non-expertise, I'm pretty sure I can't grow 40 to 50% of my money from itself. That's outright gain.

  7. Geri says:

    Yup and in my level of low expertise, I would rather prepay the P100K and gain 40% outright than risk it in stocks hoping, but without surety of immediate gains. Bird in the hand is worth more than 2 in the bush. Thanks Rae!

What's on your mind?

This site uses Akismet to reduce spam. Learn how your comment data is processed.