2025-05-02 28Hse Editor
When applying for a mortgage, banks offer a variety of repayment options to suit the needs and budgets of different people. When choosing which scheme to use, prospective homeowners should consider factors such as the length of the repayment period, the flexibility of the plan, the total amount of interest and other costs to be paid under the plan, as well as the state of the property market before making a decision.
According to the Estate Agents Authority, the five most common types of repayment schemes that are most common include (1) Straight-line repayment plan, (2) Plan with principal repayment holiday, (3) Progressive repayment plan, (4) Flexible prepayment and redrawal plan and (5) Bi-weekly repayment plan.
"The 'straight-line repayment plan' is most commonly used, a process in which the monthly repayment amount remains fixed throughout the repayment period. The monthly repayment amount remains constant throughout the repayment period, and consists of principal and interest, with the interest initially accounting for the majority of the monthly repayment and the principal accounting for a smaller portion. Here, the interest decreases as the principal decreases.
Therefore, the longer the loan term, the greater the interest portion of the initial repayment will be. It is important to note that regardless of whether you choose the “P plan” or “H plan” mortgage scheme, you will face an increase in the cost of mortgage interest, which will increase your mortgage burden when the interest rate rises, and decrease your mortgage burden when the interest rate decreases.
The upside is that the overall mortgage repayment period is shorter and the overall interest cost is reduced. The downside is that you need to check your account every two weeks to see if you have enough money to make your mortgage payments, which can affect your credit rating if you fail to make your mortgage payments on time.
Why is a bi-weekly mortgage payment better? The reason is that if you make a repayment every 14 days over a 365-day year, you will be making 26 repayments per year, which is equivalent to 13 months of monthly repayments. In comparison, the repayment period has been changed from 30 years to 26.7 years, so the interest rate will be reduced accordingly.
Under the plan with principal repayment holiday, mortgagors are allowed to make interest-only repayments during a certain period of the repayment period, usually the first two to three years, without having to repay the principal, and to repay the entire loan and interest in a straight-line manner during the remaining repayment period.
Developers will offer different payment offers and mortgage plans to attract buyers to their new properties. One such scheme is the progressive repayment plan, where buyers are only required to repay part of the loan amount in the first few years. However, as interest and loan amounts increase, the interest expense will increase significantly.
It is worth noting that the progressive repayment plan and plan with principal repayment holiday are less stable compared to traditional mortgage methods. The initial repayment of the principal starts out relatively small, making it easier for buyers to make their initial mortgage payments, and then the amount of the loan gradually increases, putting more pressure on them.
Therefore, buyers who choose the above plan usually choose to switch to a bank for lower interest rates after enjoying the first few years of the ‘honeymoon period’. The bank will then conduct a stress test for the applicant and re-examine the applicant’s income proof. If the mortgage is not approved, the applicant can only pay higher interest rates.
No matter which repayment plan you choose, calculate what you can afford before entering the market, carefully review the terms of each repayment plan, and consider factors such as interest rates and repayment periods, to choose the plan that works best for you.
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