How to Calculate Loan Repayments

Alevin Chan

Alevin Chan

Last updated 29 April, 2024

In Singapore, loan repayments are mainly calculated using amortisation or flat rate methods. Learn more about these loan repayment calculations, and tools for planning future loans. 

Personal loans are a popular financial tool, not least because of the convenience they provide. You simply need to pay a fixed repayment amount every month until the end of the loan tenure, by which your loan would be completely paid off. 

If you’re wondering how lenders arrive at how much you have to pay each month, this article explores the most common loan payment calculation methods used in Singapore, as well as useful resources for helping you to understand and plan future loans. 

Table of contents:

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Understanding how loan repayments are calculated

Loan repayments refer to the amount you have to pay each month on your loan. It is derived by adding up the principal borrowed, and the total interest (plus any fees, if applicable), and then dividing the sum by the total number of months in the loan tenure. 

For instance, let’s assume a loan of S$10,000, with 5% per annum interest, and a loan tenure of 1 year (12 months). 

Loan size

S$10,000

Interest

5% p.a.

Loan tenure

12 months

Total sum owed

S$10,500

Monthly payment

S$875

Hence, the interest on this loan is 5% of S$10,000 = S$500. The total sum owed is S$10,000 + S$500 = S$10,500. Each monthly payment would then be S$10,500/12 = S$875.

This is a mathematically sound, if basic, way of calculating a loan repayment. However, in practice, loan repayments may be calculated in several other ways for varying reasons. 

Here are three of the most common loan repayment calculation methods.

Interest-only loans

Interest-only loans allow borrowers to pay only the interest charges for the initial period of the loan, with the remaining debt repaid later. This means loan repayment amounts start off small and remain that way for a period, before spiking to dramatic heights subsequently. 

Consider the following interest-only loan:

  • Principal: S$50,000
  • Interest: 4.75% per annum
  • Tenure: 1 year
  • Interest-only period: 6 months

Here’s what the repayment schedule looks like.

Instalment months

Amount to pay each month 

1 to 6

S$197.92

7 to 12

S$8,449.16

Total interest paid

S$1,882.48

In the first six months of this loan, the borrower needs only service the interest payments, making for an enticingly small loan repayment each month. None of the principal has been paid at this point. 

From months 7 to 12, the borrower has to pay back the remainder of the loan, which is naked up of both interest charges and the entire principal. This explains why the loan repayment amount becomes so much larger in the second half of the loan. 

As you can imagine, interest-only loans can tempt certain types of borrowers into taking loans on impulse. It is for this reason that the Monetary Authority of Singapore (MAS) outlawed interest-only home loans in 2009. 

Amortising loans

In an amortising loan, loan repayment amounts are fixed every month, and remain the same throughout the duration of the loan. This provides borrowers with stability and predictability, as you need only pay the same amount each month. 

Interest is calculated on the outstanding principal, and reduces with each instalment as the principal is paid off. This means the interest paid is highest in the first instalment, but goes down with each subsequent instalment. In turn, this allows more and more of the principal to be paid off each month.

To illustrate, let’s assume we have a S$600,000 loan payable over 20 years at a fixed rate of 3.5% per annum, with 240 equal monthly repayments of S$3,480 each. 

Here’s how this amortising loan may look like in action for the first three years.

Year

Principal paid per month

Interest paid per month

Total paid per month (principal + interest)

1

S$1,729.76

S$1,750

S$3,480

2

S$1,791.28

S$1,688.48

S$3.480

3

S$1,854.99

S$1624.77

S$3,480

Notice how interest paid goes down over time, while principal paid rises instead. The total paid each month remains fixed.

Flat-rate loans

Much like an amortising loan, a flat-rate loan also offers fixed monthly payments, creating no difference in terms of loan repayments. 

The difference lies in how interest is calculated. In a flat rate loan, interest is calculated according to the original principal, and the interest amount remains the same in every instalment. This is so even though your outstanding loan reduces over time. 

Flat rates are commonly used in personal loans and car mortgages in Singapore. 

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How are home mortgage loans calculated?

Home mortgage loans in Singapore are calculated as amortising loans. As explained earlier, this means that your monthly loan repayments are weighted towards interest charges at the beginning, with the balance shifting towards repaying the principal as the loan progresses.

This is the case for both fixed-rate and floating interest mortgage loans. The terms “fixed-rate” and “floating interest” simply describe the interest rate applied on the mortgage loan. 

In a fixed-rate home mortgage, the interest charged on your loan stays the same for a stipulated number of years - known as the lock-in period. Beyond this period, the interest rate is subject to changes at the lender’s discretion.

Fixed-rate mortgages offer a degree of certainty as they allow homeowners to lock in a steady interest rate during a period when interest rates may be rising. 

In a floating interest mortgage, the interest rate fluctuates as it tracks a reference rate. As such, the loan repayment amount in a floating interest mortgage is not fixed, and borrowers should be ready for changes. 

However, the advantage of floating rate mortgages is that the reference rate can move in both directions – up and down, so there may be periods where homeowners can enjoy lower mortgage payments. 

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How to calculate CPF loan repayment for HDB flats?

If you’re planning to fund your home mortgage using your CPF monies, here’s a handy tool that can help you crunch the numbers. This is the CPF Board Housing Mortgage Calculator, which is available online for all to use. 

You don’t have to login to make use of this calculator. After accepting the customary disclaimer, click the “Start Button” to proceed. 

You will be asked presented with the following four choices:

  • Monthly instalment amount
  • Maximum loan amount
  • Loan still outstanding at desired retirement age
  • Loan repayment period 

After you pick your option, scroll down and you’ll see several fields. Input the relevant figures or information in each field, and click “Calculate” to get your answers. 

Let’s take a look at what each of the four options do.

Monthly instalment amount 

Choose this option if you want to find out how much your monthly mortgage payments will be. All you need is the loan amount, the interest rate and the loan tenure in years. 

Click “Calculate” and you will be presented with two figures – your monthly instalment amount, and the total amount to pay in a year. 

Do note that this calculator assumes your interest rate remains unchanged throughout your mortgage term. Thus, if you’re planning on refinancing, or using a floating-rate mortgage, your results will differ. 

Maximum loan amount

Use this option if you want to estimate the maximum loan amount you can afford, based on your monthly budget. Hence, you will need to enter the amount you can pay each month for your home loan, the mortgage interest rate, and the mortgage term in years. 

Click “Calculate” to obtain the maximum loan amount for your mortgage. This amount can be a combination of CPF Ordinary Account savings and your own cash. 

Loan still outstanding at desired retirement age

This option lets you estimate how much of your mortgage loan would still be outstanding by the time you retire. It is a good way to gauge your retirement readiness. 

You'll need to enter the age you plan to retire, the age you started your housing loan, the initial loan amount, monthly instalment payment, and mortgage interest rate. 

Click “Calculate” to find out how much of your mortgage is still outstanding at retirement. You should then make preparations to fund the remaining mortgage during retirement, such as by ensuring you have sufficient savings by then. 

Alternatively, you could try to increase your monthly instalment payments to reduce the outstanding amount, or pay off your mortgage completely before you enter retirement.

Loan repayment period

This fourth option helps you calculate how long it would take to pay off a mortgage loan. You simply need to enter your total loan amount, monthly instalment amount, and loan interest rate. 

By entering different values for the three variables, you can see how your loan repayment period will be affected. This helps you plan for your mortgage payment, which is often a long-term financial commitment. 

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Loan repayment calculators

The CPF Board Housing Mortgage Calculator is just one of many online loan repayment calculators out there, the vast majority of which you can access for free and without sign-ups or logins. 

You will find loan repayment calculators on many lenders’ websites, including banks, mortgage brokers, and licensed moneylenders. In addition, there are also investing, financial or educational websites that offer a range of online calculators, from simple ones akin to what we’ve described above, to complex calculators that can even generate charts and graphs based on your input. 

And oh yes, you can bet there are calculator mobile apps you can download to your phone and use any time you please. 

By far, using a loan repayment calculator is the easiest and fastest way to calculate loan repayments for different types of loan. All you need is to enter the relevant details, such as loan amount, interest rate, monthly payment amount, and etc. 

With these handy, efficient and convenient tools so easily available, there is little need for the average consumer to look up loan repayment formulas, much less execute complex calculations on their own – and risk getting it wrong. 

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Frequently asked questions (FAQs)

Q: How to save money on loan interest payments?

The amount of interest paid on a loan is determined by the interest rate and the loan tenure, and paying attention to these two factors can help you save money on interest payments. 

Firstly, try to get the lowest Effective Interest Rate you can find to pay less interest charges. 

Secondly, you can also try going for a shorter loan tenure to reduce the total amount of interest  paid. However, doing so will increase the monthly repayment amount, so you should only do this if you’re able to cope with the larger instalments.

Q: Can I repay my loan early?

There’s nothing stopping you from repaying your loan early, but in most cases, you will need to pay an early repayment fee which is based on your outstanding loan amount. This basically neutralises any potential savings from repaying your loan early. 

If you’re eager to completely discharge your loan responsibilities as soon as possible, try paying more each instalment. The extra amount will accrue as credit, allowing you to skip the last few instalments towards the end of the loan. 

Take care to monitor your loan statements carefully when you do this to ensure sufficient credit in your account and avoid incurring late repayment fees. 

 

Read these next:

How Much Loan Can I Get from a Bank in Singapore?

How to Calculate Loan Interest Rates

This Is How Much You Can Borrow From Different Loans In Singapore

Instant Online Loans – How Do They Work?

Millenial Loan Sharks: 5 Scammy New Tactics to Watch Out For

How to Get a Cash Loan From Your Card’s Credit Limit

 

An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.

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