2025-08-12 28Hse Editor
After successfully purchasing a property, the mortgage repayment journey spans decades and occupies a significant portion of a person's life. According to the Hong Kong Monetary Authority, the maximum mortgage repayment term is currently capped at 30 years. If you find yourself with extra funds during this period and want to repay early to reduce interest payments, is it a good idea?
Early repayment is generally seen as beneficial. Its advantages include saving on interest, reducing monthly repayment pressure, and increasing financial flexibility. However, it's crucial to check whether the penalty period has ended. If it hasn’t, early repayment may incur penalties. So, what exactly is prepayment penalty?
When applying for a mortgage, banks usually set a penalty period as a mechanism to protect their revenue. If a borrower repays the loan early during this period, they may need to pay handling fees. Some banks may even reclaim the cash rebates previously granted to the borrower to compensate for the loss of interest income. This also prevents borrowers from obtaining cash rebates and immediately refinancing with another lender.
The loan agreement specifies the duration of the penalty period and the associated charges. Typically, this period lasts two to three years, starting from the loan drawdown date, though the exact duration varies by bank.
For example, if the penalty period is two years, the borrower would need to complete 24 monthly repayments before repaying early without incurring penalties. However, if you plan to refinance your mortgage, you don’t need to wait until the end of the penalty period. This is because mortgage approvals are valid for three months. Therefore, you can apply for refinancing up to three months before the penalty period ends.
To apply for early repayment, borrowers must submit an application form and choose between full repayment or partial repayment. For partial repayment, you need to indicate the repayment amount and decide how to adjust the remaining loan terms. For full repayment, the bank will inquire about the reasons, such as whether the property is being refinanced, sold, or if repayment is due to surplus funds. Borrowers must provide truthful information.
Each bank has its own penalty interest calculation method, and some banks may impose a minimum penalty amount. The most common approach is to calculate the penalty as a percentage of the original loan amount. The penalty amount typically decreases each year—for example, a higher penalty in the first year and a lower one in the second year. Some banks, however, calculate the penalty based on the remaining loan balance.
If you don’t have surplus funds but instead need additional financing, will applying for a top-up loan during the penalty period incur penalties? The answer is no. Unlike refinancing, applying for a top-up loan with the same bank to borrow additional funds won’t harm the bank’s interests, so penalties generally don’t apply.
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