Financial LiteracyCredit and LoansPersonal Finance

Oops I Did It Again (Home Loan Partial Prepayment)(2-min read)

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 the richer life:

6 thoughts on “Oops I Did It Again (Home Loan Partial Prepayment)(2-min read)

  1. 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.

    1. 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.

  2. 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.

  3. 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.

  4. 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!

  5. 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.

What's on your mind?

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