calculating mortgage interests

How Much Interest Do You Actually Pay?

The answer is – about $12,000 per year in the first 10 years of the loan tenure. In other words, $1,000 per month.  

$750,000 OVER 25 YEARS AT 2%

mortgage interest ammortization

This is based on a typical private property loan of $750,000 over 25 years at the long-term average interest of say 2% (some years you will pay 1.50% but other times you might pay 2.50%).  Most people service a mortgage repayment every month without really knowing how much is the exact interest they are paying the bank every year.  

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How does this change if the initial loan amount is $400,000 or $1,200,000?  Let me give you the corresponding mortgage loan amortizations based on the same 25 years tenure at 2% interest.

$400,000 OVER 25 YEARS AT 2%

home loan interest ammortization

$1,200,000 OVER 25 YEARS AT 2%

housing loan ammortization

For the first 10 years of the loan, the average interest per year will be at approximately $7,000 (~$600 per month) or $20,000 (~$1,600 per month) respectively.

For discussion sake, let’s keep to the typical loan of $700,000.  We use the first 10 years because I kind of suspect many of us would do partial prepayments over the years and probably clear off the entire loan or be left with very small outstandings before they hit 50 years old.  Also, amortization by definition is interest-heavy in the initial years of the loan as the interest component comes down over time.  The main bulk of the interest is paid in the first 10 years which constitute 62% as your can in our example above ($125,460 out of total interest of $203,672).

Even if you pay off the entire loan in 10 years, you still need to contend with managing this costs of approximately $12,000 per year or $1,000 a month. Would you like the idea of paying an additional half a year’s interest or $6,000 to the banks?  Obviously not.  But that’s exactly what most people may be doing unknowingly.  Read on.

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After understanding the interest costs, let us look at 3 interesting questions about managing these costs:

Question 1: If I refinance every 2-4 years – do I pay more interest all over again with another set of higher interests in the first 10 years?

To answer that, let’s look at this more closely with a drop in interest rate from 2% to 1.80%, after doing a refinancing exercise exactly 4 years later (remaining tenure of 21 years).

HOME LOAN 1

mortgage interest ammortization

HOME LOAN 2

mortgage loan amortisation

Notice both loans end exactly in year 2044.  If you keep to the same original tenure of the loan each time you refinance, ie. take 25 (in this case) minus the no of years you have already serviced the loan, to be the new tenure, there will be no incremental interests as you can see from the two tables.  There isn’t another new set of 10 years of front-loaded interests to service all over again.

In fact, comparing like-for-like in the first 10 years of the new refinanced Home Loan 2, you can see there is substantial savings each time you refinance.  With a mere drop of 20 basis points (from 2% to 1.80%), notice for the remaining 21 years period from 2024-2044, the difference in total savings paid can be as much as $15,597! (add the interests from year 2024 to 2044 in Loan 1 at $147,394 vs. that in Loan 2 at $131,797).

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Question 2: How can I better manage this interest costs over the long-term?

As the annual interest costs is just short of owning a car in Singapore (annual depreciation $10,000-15,000), it is important to ensure that you always “jump to” the next lowest rate home loan whenever your lock-in ends.  That’s no-brainer.

However, the reality is that most clients contact us only when they receive the letter from the bank notifying them of the interest rate revision from next month. By the time they finish the research, apply for and sign on the dotted line to the next better home loan, they would most likely need to serve out another 3 months’ notice on their current loan at the new increased mortgage rate.

From anecdotal evidence, we put this increase at an average of 0.50% over the lowest prevailing home loan rate in the market.  Based on $750,000 typical loan and assuming paying down to $650,000 over time, this 0.50% increase for another 3 more months’ wait translate into: 3/12mths x 0.50% x $650,000 = $812.

For a loan of 25 years, if we assume a homeowner switches bank every 4 years (after the typical legal fee clawback period of 3 years in Singapore) for lower rates, that’s roughly 6 rounds of home loan refinancing opportunities.  And if each time the homeowner is late in doing this, the additional costs that he or she has to cough out would be $812×6 = $4,872. That’s equivalent to paying 5 months or close to half a year’s worth of additional interest to the banks!  And that’s on top of the 25 years of interest on the loan itself.

You can argue that one could easily reprice and avoid serving out this 3 months’ notice. It depends.  There will still be additional costs in the form of a conversion fee usually $500.  Not forgetting you may not get the absolute lowest rate in the market with the same bank – there is opportunity cost for more interest savings.  It could all work out to be the same.  Or more likely, in our opinion, costing more than 6 months’ of “additional interest”.

That’s the reason why more people now choose to work with a professional mortgage broker long-term, who will call 4-6 months ahead of this renewal deadline. Furthermore, the entire process is made a breeze with comprehensive rate comparison which again saves you precious time in serving the redemption notice needed.

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Question 3: How can I be sure that I will can get a better (lower) rate when I refinance?

Besides working with professional mortgage consultants, another important thing is to always keep an open mind.

Of late we’ve heard that one foreign bank is bowing out of the mortgage business in Singapore quietly.  That’s good news for lenders but bad news for consumers like you and me.  For many years, this lender has been known to offer superb fixed rates that give local banks (usually stronger in fixed rates) a run for their money.  With fewer players, the free market mechanism does not work quite as well and this is to the detriment of homeowners and investors.  Just look at what happened when Uber exited the market in Singapore.  Or how in certain segments of the business, banks tend to match one another in rates which then leaves borrowers with no other choice but to accept the seemingly high rate.

To ensure one always get the lowest rate possible, it is important to be receptive to packages from all lenders local or foreign.  In fact, foreign banks with their smaller customer base tend to be hungrier for your business.  So, if you like to benefit from free market compeititon, you’ve got to stay open. After all, most of the major foreign lenders have been deemed too big to fail (D-sib banks) by MAS and have been required to incorporate local operations.  Effectively, they are like local banks.

Even if any other foreign bank decides to bow out of the market, it will be done in an orderly manner with either sale of entire mortgage portfolio (on all existing terms) to another bank in Singapore, or simply non-renewal when the lock-in ends. You’ll just have to refinance out to the next better loan.  After all, you have already benefited from the lower rate over the past few years.

In summary, after understanding how much interest costs you pay on a mortgage over time, it is important you work with professional mortgage consultants.  We can help you save probably 6 months or up to a year’s worth of “additional interest costs” by ensuring no delays in moving from one home loan to another.  More importantly, by keeping an open mind, you access the best rates out there in the market at any point in time be it from a local or foreign bank. 

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Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, or to buy your next Singapore property, speak to our dedicated team of mortgage consultants here for the best home loan rates.

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