Partial Prepayment

What it is

A partial prepayment is an extra, one off payment you make toward your mortgage's outstanding principal, separate from your usual monthly instalment. Instead of paying off the whole loan at once, which would be a full redemption, a partial prepayment simply chips away at the balance faster than the original schedule requires, for example after receiving a bonus, an inheritance, or savings you want to put toward reducing debt.

How it works

Because interest is calculated on the outstanding principal, reducing that principal early through a partial prepayment lowers the interest you pay for every month afterward, even if your monthly instalment amount stays the same. Some banks allow borrowers to make a certain amount of partial prepayment each year free of charge, often described as a fee free allowance, while amounts above that allowance, or prepayments made during a lock in period, can trigger a fee. The exact allowance, fee structure, and percentages differ by bank and change over time.

A simple worked illustration

Say a buyer with an outstanding loan of 600,000 dollars makes an illustrative partial prepayment of 50,000 dollars in year three of a 25 year loan. That immediately reduces the outstanding principal to 550,000 dollars, which lowers the interest charged in every following month compared with not having made the prepayment, even though the scheduled monthly instalment itself may not change unless the borrower also asks the bank to shorten the tenure. This is a rounded, made up example to illustrate the effect, not a real loan calculation.

What first time buyers get wrong

• Assuming any extra payment automatically shortens the tenure, when some banks simply lower future interest while keeping the same monthly instalment unless you specifically ask to shorten the tenure.
• Not checking the fee free allowance before making a large prepayment, and ending up paying a penalty unnecessarily.
• Prepaying during a lock in period without checking whether that specific prepayment falls outside the bank's allowance.

What to check

Ask your bank what annual fee free prepayment allowance applies to your loan, whether making a prepayment reduces the tenure or the monthly instalment, and whether any lock in period restrictions apply. Confirm the current terms with your bank before making a lump sum payment, since Winfred does not recommend when or how much to prepay for your own situation, this page explains the mechanism only.

Winfred Quek is an Associate Marketing Consultant at Crestbrick Pte Ltd (CEA Licence No. L31010886H). CEA R073319H. This page is for general information only and does not constitute financial, investment, or legal advice. Verify current figures with IRAS, HDB, CPF Board, or MAS before making any decision.