What Is Home Loan Amortisation and How It Affects Your Mortgage Repayment in Singapore
Using a mortgage amortisation calculator is an easy way to determine the schedule and monthly mortgage payment amounts of an amortised loan. But what is home loan amortisation, and how does it affect you as a home buyer?
Unless you have enough cash on hand to pay off the entirety of your new home, most first-time buyers will have to take a home loan. Whether from HDB or their preferred bank, a home loan will eventually have to be repaid with interest.
That’s where amortisation comes in. It’s basically how you will pay off your home every month. In this article, we’ll show you how to utilise a home loan amortisation schedule to plan for your repayments. Have other questions? Ask our team of dedicated and knowledgeable Mortgage Experts.
What Is Home Loan Amortisation?
Home loan amortisation essentially breaks down one’s loan repayments into small, consistent chunks, and you get to repay both your principal and interest at the same time.
Since both the principal and interest are repaid in equal-sized chunks, the borrower/homeowner can easily manage their loans over time as they pay the same amount each month.
Other factors (such as a partial repayment, a progressive disbursement, or a change in interest rate) could impact the process, but this is generally how it applies to home loans for most homeowners. You can use a mortgage amortisation calculator to determine your home loan amortisation schedule.
Currently, mortgage amortisation is the only mode of repayment in Singapore. That has been the case since interest-only loans were banned in 2009.
What Are Interest-only Home Loans?
This section is mostly FYI since mortgage amortisation is now the only way to repay your home loan.
While researching home loans, you might come across ‘interest-only mortgages’ or ‘interest-only loans’. This type of loan requires the borrower to pay only the interest on the loan for a certain period. The principal is repaid either as a lump sum on a later date or in subsequent payments.
Because you are paying just the interest at first, the repayment amount is usually much lower than that of amortised loans when repayment first begins.
Why Were Interest-only Home Loans Banned?
First, interest-only loans encouraged property speculation. In the past, some buyers would purchase a private property in Singapore while it was still under construction and opt for an interest-only loan. Right before the construction was completed and the principal repayments kicked in, these buyers would sell the property as quickly as possible to earn a significant profit.
The second reason was to discourage overexposure. One of the downsides of interest-only loans is that, once the principal repayment kicks in, the amount is usually significantly higher than when it was just the interest repayment.
While this might not be a problem under normal circumstances, the sudden increase in financial burden could become a significant challenge, especially if it coincides with a downturn in one’s financial situation.
For example, if the homeowner loses their job or experiences a medical emergency, they may not be able to repay the loan. Of course, such risks also apply to other home loan options. Still, the jump for interest-only loans is significantly greater, thus creating a potentially bigger burden for financially uncertain homeowners.
How to Use a Mortgage Amortisation Calculator
One easy way to think about home loan amortisation is that it is basically your monthly mortgage instalment. Here’s an example.
You and your partner are purchasing a condominium for $1 million, 70% of which (or $700,000) will be covered by a bank loan with an annual interest rate of 2.6% over 20 years.
Then, your monthly repayment schedule will look something like this:
Time | Interest rate | Balance | Monthly instalment | Interest payment | Principal payment |
Month 1 | 2.6% | $697.773 | $3,743.52 | $1,517 | $2,227 |
Month 2 | 2.6% | $695,541 | $3,743.52 | $1,512 | $2,232 |
Month 3 | 2.6% | $693,305 | $3,743.52 | $1,507 | $2,237 |
– | – | – | – | – | – |
Month 240 (20 years) | 2.6% | $0 | $3,743.52 | $8 | $3,735 |
If you choose to make prepayments on your home loan, keep in mind that it will mean that you pay down the overall principal of the loan faster.
For example, if you decide to make a $100,000 payment one month into your home loan, then the total amount of principal owed will be less than what it would have been if you stuck to paying $3,743.52 that month. This will also reduce the total interest you’ll owe throughout the loan.
However, most bank loans come with pre-payment penalties. If you want to pay down your mortgage, check if you will incur this additional expense.
You can use an online mortgage amortisation calculator if you’d like to work out your home loan amortisation schedule. Alternatively, you can use our mortgage repayment calculator if you’re working with estimates,
Need Home Financing Advice? Ask PropertyGuru Finance
After using a mortgage amortisation calculator and getting your home loan amortisation schedule, you’ll know exactly how much your repayments are. Seeing all the repayments you must make across the entire loan tenure might seem overwhelming initially, but trust us when we say that loan amortisation makes the whole process much more manageable.
We hope this article helped you understand the concept of home loan amortisation better and how a mortgage amortisation calculator can be helpful for budgeting.
If you have any other home loan amortisation questions or need help choosing a suitable home loan to finance your property purchase, chat with one of our Mortgage Experts. The best part? It’s free!
