Prepayment

When a customer wants to pay in excess of the fixed monthly installment, the excess amount is termed as "prepayment".

Generally. there are two types of prepayment:
a) Partial Prepayment
It is when the customer make prepayment in the form of a lu mp sum but does not fully settle or repay the entire housing loan.

For partial prepayments, some banks may require pre-notification or may impose some restriction on the amount to be pre-paid while others may impose a penalty fee. However, there are also banks that do not impose such restrictions as part of their product features intended to help customers save interest.

b) Full prepayment
Prepayment which fully settles the outstanding housing loan amount.

Different banks may have different terms and conditions imposed on prepayments. Normally, these terms
and conditions are clearly stipulated either in the product brochures, letter of offer or in the loan agreement.

Full prepayments are usually subject to penalty charges, which are also known as “early settlement penalty”. Banks will usually stipulate a minimum loan period that the customer must maintain his loan there, commonly for a period of 2 years, but could be longer depending on the Bank. If full prepayment is made within this time period, an early settlement penalty will be imposed.

After the required minimum loan period has passed, banks normally would not charge any early settlement penalty, even if the loan does not satisfy the original loan period.

Waiver of Penalty Fees on Prepayment

On a case-to-case basis, some banks may consider reducing or waiving the penalty fees based on the following business reasons:
- Existing loan customer who is selling the property to another buyer who is taking up a loan with the same bank, i.e. continuity of business.
- The loan customer is settling the loan and replacing it with another loan application of a property which is similar or larger in amount.
- Compassionate financial reasons. The existing loan customer has some financial difficulties and is forced to sell the property at a loss.

However, one should note that banks are not obligated to waive or reduce penalty fees, which have been clearly stipulated in the loan agreement contract. 

Frequently Asked Questions (FAQ)

1. Will the prepayment be treated as principal loan reduction or as an advance payment?

The customer will need to specify the intention of their lump sum prepayment, whether it is for principal loan reduction or advance installment.

2. What is the difference between principal loan reduction and advance payment?

a) Principal Loan Reduction
Lump sum payment will be used to pay off the loan's interest charges for the month and the balance of the lump sum prepayment will be used to reduce the loan's outstanding principal. However, the customer is still required to continue with the subsequent monthly installments.

b) Advance Payment
Lump sump payment will be used to pay the installments in advance. No future monthly installment is required up to the number of monthly installments the advance payments have covered. There is no change in the period of the loan.

3. Which type of prepayment is more beneficial, principal reduction or advance payment?

For principal loan reduction, interest savings can be substantial since the lump sum prepayment reduces the principal loan amount which will reduce interest charges. This reduces either the loan period or the monthly installment amount. On default, the bank will normally reduce the loan period and maintain the monthly installment amount. Again, you are required to continue with your installment payment the following month.

For advance payment, the customer simply enjoys the convenience of not making future monthly installments until the lump sum prepayment is exhausted. However, there will not be interest savings and the loan period and monthly installment amount remain unchanged. If interest is computed based on daily outstanding balance, there can be immediate savings on interest.

4. For full prepayment of loan, banks require the customer to give one month notice. After serving the necessary notice, will I still be subjected to penalty interest?

If notice is required, there will not be penalty charges once the written notice has been served. However, it is important to understand the terms and conditions of the full prepayment clause in the loan agreement as it may differ from one bank to another.

5. Why do banks charge penalty for prepayments?

This is due to the administrative and funding cost that have already been incurred by the bank to finance the loan.

6. How do banks calculate penalty charges for full prepayment or early loan settlement?

Different banks use different methods. While some calculate penalty charges based on a percentage of either original loan or outstanding balance, others may impose a flat rate, usually between three to six month’s interest against the original loan amount. Each bank has its unique loan features to provide the most attractive loan package for the customer to save interest.

7. When do banks charge penalty for full prepayments or early loan settlement?

Usually, penalty charges are levied for loans which have been fully settled within two to five years from the date of the loan’s commencement. This period would however differ from bank to bank.

Do share if you have further information or any opinion on the information of the prepayment charges on the housing loan.

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