Definition
Prepayment
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A mortgage prepayment basically refers to a payment made by a borrower to reduce the principle balance on the home loan, thereby reducing interest costs.
A partial prepayment is any lump sum payment towards the outstanding balance to reduce it. While a full prepayment is a payment that completely pays off the entire balance of the loan.
They can also be called partial redemption and full redemption.
Home loans in Singapore can either be structured with prepayment penalty charges, without them, or have a combination of both.
For most housing loans, prepayment penalties would be definitely incurred during the early years of a loan due to an active lock-in period. After which there would be no penalties for partial redemption, but a borrower would be penalized for full redemption.
The penalty fees would be charged on a percentage of the amount being prepaid.
For example, 1% on the prepayment amount.
This means that if a loan for example has $100,000 outstanding, a 1% full redemption penalty would mean that the borrower would have to pay $101,000 to redeem the loan… plus any administrative charges.
In some loan contracts, a borrower would have redemption penalties waived should the property be sold within a number of years from loan commencement.
This is to target flippers and speculators who are looking for sub-sales profits.
In competitive lending environments, lenders can insert harsh prepayment clauses into loan agreements to deter borrowers from refinancing with other banks.
Oddly enough, for under construction properties, home loans often don’t come with lock-in period.
It’s as if lenders find them risky and encourage borrowers to switch to another bank.
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