Partial Prepayment or Full Settlement: A Worked Early Exit Calculation

An illustrative comparison of paying a lump sum into a home finance, settling it entirely, or keeping the cash, with the figures that decide which one wins.

An early exit decision has three options, not two: pay part, pay everything, or keep the money. Each produces a different total cost and a different liquidity position, and the right answer depends on the settlement calculation in your own contract. The figures below are illustrative and show the method only. Any amount payable on early settlement is set by your contract and the lender’s policy within the framework SAMA supervises, and must be confirmed with the lender before you act.

The situation

A borrower has SAR 400,000 available after selling a plot. Her home finance has an outstanding balance of SAR 900,000 with nine years left and an instalment of SAR 10,500 a month. She wants to know whether to put the whole amount in, settle as much as she can, or keep the cash, and she has an elderly parent to support and no other reserve.

Assumptions (illustrative)

• Outstanding balance: SAR 900,000.
• Remaining term: 9 years, or 108 months.
• Current instalment: SAR 10,500 a month.
• Cash available: SAR 400,000.
• Assumed early settlement administration on a partial prepayment: SAR 3,000 per event.
• Assumed cost of a full settlement in this illustration: SAR 18,000 above the outstanding balance.

Step 1: Total the payments remaining if nothing changes

SAR 10,500 multiplied by 108 months equals SAR 1,134,000 against a balance of SAR 900,000.

Running the schedule to term costs SAR 234,000 more than the balance. That figure is the pool from which any prepayment saving has to come, and it caps how much any of these options can be worth.

Step 2: Option one, prepay SAR 400,000 and shorten the term

The balance falls to SAR 500,000. Holding the instalment at SAR 10,500 clears SAR 500,000 far sooner, and in this illustration the remaining payments total roughly SAR 567,000 including the SAR 3,000 administration.

Total paid becomes SAR 400,000 plus about SAR 567,000, which is SAR 967,000 against SAR 1,134,000. The saving is roughly SAR 167,000 and the borrower is debt free several years early.

Step 3: Option two, prepay SAR 400,000 and reduce the instalment

The same SAR 400,000 against the balance, with the term held at 108 months, produces an instalment in this illustration of about SAR 5,900, so remaining payments total about SAR 637,000.

Total paid is about SAR 1,037,000, a saving of roughly SAR 97,000. She saves SAR 70,000 less than option one but frees SAR 4,600 a month for nine years.

Step 4: Option three, settle in full

Settling requires the SAR 900,000 balance plus the assumed SAR 18,000, which is SAR 918,000. She has SAR 400,000, so this is not available without borrowing elsewhere.

The option that looks most attractive in principle is simply off the table, which is worth establishing before spending time on it. Full settlement becomes relevant only if a larger sum arrives.

Step 5: Option four, keep the cash

Holding SAR 400,000 forgoes the saving of SAR 167,000 under option one. Spread over nine years that is about SAR 1,550 a month, which is the monthly price of holding the reserve.

Framed that way the question becomes answerable: is a liquid reserve of SAR 400,000 worth SAR 1,550 a month to this household, given a dependent parent and no other savings?

Step 6: Split the difference and price it

Prepaying SAR 300,000 and retaining SAR 100,000 captures roughly three quarters of the option one saving, about SAR 125,000, at a monthly reserve cost of about SAR 390.

A partial prepayment is usually the answer where the alternative is zero liquidity. The marginal cost of keeping a modest reserve is small; the cost of having none can be an arrears record.

What changes the answer

• Whether your contract permits partial prepayment at all, how often, and with what minimum amount.
• How the lender calculates any amount due on early settlement, and whether it is a formula or a discretion.
• Whether the lender applies a prepayment to shorten the term or cut the instalment, and whether you may choose.
• Whether your pricing can reset, since prepaying also reduces your exposure to a future increase.
• Whether the same cash would clear a shorter and more expensive obligation first, which usually it should.

What the numbers tell you

• Price the option of keeping the cash as a monthly figure, because that is the only way to compare it fairly.
• Shortening the term beats reducing the instalment on total cost, and loses on monthly flexibility.
• Clear expensive short obligations before prepaying a long property facility, almost without exception.
• A prepayment that leaves no reserve can cost more than it saves if it leads to a single missed instalment.
• Get the settlement calculation in writing from the lender before you move any money.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira works alongside the finance side of a property purchase or a build: the valuation evidence, the cost plan and the construction programme that a lender needs to see. The lending terms come from your bank or finance company, and Domira makes sure the property side of the file stands up.