When choosing a home loan, you need to take a lot of critical decisions for yourself – paramount to your success in repaying a home loan. Apart from the mortgage interest rates, one such decision is deciding the length of your home loan tenure. Simply put, having a shorter tenure is ideal since you pay off your mortgage faster but it may not be well suited for everyone.
To help you make a better financial decision, in this article, we will take you through a comprehensive comparison of the pros & cons of choosing a short-term and long-term loan tenure.
First things first, the term “loan tenure” is the amount of time a borrower is given to fully repay the total loan (principal loan and interest) to the lender. All types of loans, including home loans, come with a loan tenure. A 30-year loan tenure indicates that the borrower has to pay off the total loan amount in a period of 30 years.
Home loans typically have a longer tenure that may stretch up to a few decades depending on the loan amount and a few other factors that we will discuss below. The maximum loan tenure a borrower can get in Singapore depends on the type of property being purchased.
As stated by the Monetary Authority of Singapore (MAS), a home loan tenure can be up to 30 years for HDB flats and a maximum of 35 years for private properties, such as condos, apartments, bungalows, semi-detached houses, etc.
Please note that the maximum loan amount (loan-to-value, or LTV) could go down to 55% or less of the property price in case your loan tenure goes beyond 25 years for an HDB flat (public property) and 30 years for private properties.
MAS has not specified a no minimum tenure for home loan. Although you can opt for shorter loan tenures. Mostly it is best to keep the original loan tenure during financing as you can request to change your tenure even after getting the loan.
Although it is subject to the bank’s approval. Some banks may also charge a fee for doing this.
As we said, in Singapore, your loan tenure affects your home loan quantum. Let’s have a look at the various factors below.
The age and income of the borrower have a direct impact on your home loan tenure. For example, a 30-year old (young) will have a higher probability of getting the best and shortest loan tenure over a 45-old (middle-aged) or someone close to retirement as the lender bank wants to be sure that their loan as the highest probability of full repayment.
Also, your LTV, TDSR or MSR will vary based on your age and gross pay, particularly when you want to secure a home loan with your partner.
Read more: How housing loans work?
The type of property refers to an HDB flat or non-HDB flat (private property). If you are taking a home loan for a private leasehold property, the tenure cannot extend the remaining period of the lease even though the property is in good condition.
For properties constructed on leasehold land, the lender would generally be disinclined to risk the possibility of the land lease not being renewed. Although such cases are rare, the situation may arise for a property if the lease period is nearing its end.
Whether you take an HDB concessionary loan or bank home loan, it is going to impact your loan tenure. If you are taking up a mortgage loan at the maximum 75% LTV, the loan tenure for an HDB or Executive Condominium (EC) is restricted to 25 years while for private properties like condos and landed properties, it can be capped to 30 years.
If your preferred loan tenure is long and can only be repaid after the age of 65, your Loan-To-Value ratio will be reduced. A first-time homebuyer can borrow up to 75% LTV from banks, however, this can be lowered to 55% if the tenure is more than 30 years or the loan period exceeds past the borrower’s age of 65.
For example, if a 45-year old ask for a 25-year loan, then the bank can only provide 55% LTV since (45+25 > 65, the retirement age). This will directly affect the property he/she was looking to buy.
If you think that asking for a shorter loan tenure can solve the above problem, you might be mistaken and it may not be the case, always. A shorter loan tenure could affect your TDSR, thus affecting your home loan eligibility.
Regulators limit TDSR at 60% of the gross monthly income and TDSR applies to all property loans whether public or private. If income is low, TDSR imposes a limit that will affect monthly repayments and cause the borrower to have to take a longer tenure.
If you are buying an HDB flat or a new EC, there is an additional requirement of the MSR, which suggests that your home loan cannot exceed 30% of your gross monthly income. Shorter loan tenures mean higher monthly mortgage repayments, which may exceed your MSR.
This means if the borrower’s gross income is low and restricts the monthly mortgage repayments, the borrower will have to take a home loan with a longer tenure.
When considering to take up a shorter tenure for a home loan, there are three things you must keep in mind:
Making repayments over a longer loan tenure means eventually paying more towards interest over the entire duration of the loan. Since the higher the loan amount, the higher the monthly mortgage repayment, opting for shorter loan tenures can help you keep the interest over monthly repayments as low as possible.
Let’s take an example. Suppose you borrow $500,000 at the current HDB housing loan interest rate of 2.60% for two different tenures – 25 years and 15 years.
|Loan Tenure (in years)||25||15|
|Estimated Monthly Repayment||$2,268.35||$3,357.53|
|Total Interest ($)||$180,504||$104,356|
|Total Payment ($) (Loan Amount + Total Interest)||$680,504||$604,356|
Clearly, when you select a shorter loan tenure of 15 years over 25 years, you will save almost $76,148 more!
In addition to reducing your total interest, home loans with shorter tenures help to avoid costs such as refinance processing fees, lump sum payment charges, etc. typically associated with long-term loans.
Although you can even choose a longer loan tenure initially and still pay off your loan in full a few years before the completion if you can.
Shorter loan tenure means paying a higher monthly repayment, which could mean a risk of eating away a big chunk of your monthly salary.
But if that seems affordable to you without adversely affecting your lifestyle or putting yourself at the risk of late repayments, you can fully pay off your home loan choosing a shorter tenure to enjoy peace of mind and freedom from paying debts any further.
By paying off your loan quickly, you are relieving yourself of this financial burden. This allows you to even take some time off work or switch to a less stressful/demanding (and lower paying!) job if you ever feel like burning out.
Making an extra mortgage repayment each year could also help shorten the loan term significantly. For example, a $250,000 home loan for 25 years at a 3.75% interest rate would result in a monthly repayment of around $1,285.
By paying one extra payment of $1,285 per year, according to a loan amortization schedule, you will be repaying the home loan 2 years 11 months earlier, saving a substantial amount of $17,381 in interest.
For some borrowers, the most budget-friendly way to do this is to pay 1/12 extra each month. This means by paying a sum of $975 every month in place of a $900 mortgage repayment, you will have paid the equivalent of an extra payment by the end of the year.
On the other hand, for those with an already stretched thin monthly budget, a lump sum payment (at the time of receiving a tax refund or annual bonus) equivalent to one regular monthly payment per year may seem more comfortable instead of increasing each monthly payment.
That’s right. Committing more to pay off the home loan with a shorter tenure means that more of the TDSR limit is committed to the home loan, which leaves you with a lesser allowance for other property loans.
So, if you have any plans of buying more properties, a shorter loan tenure might affect your TDSR limit and restrict you from buying additional properties.
On balance, there are benefits of taking up a home loan with a longer loan tenure for any investor or homeowner apart from easing the payment of your home loan. Let’s take a look below.
As discussed, monthly repayments will kick up significantly as you reduce your loan tenure and vice versa. For instance, you want to buy an HDB BTO flat worth $464,000. Now assuming you took an HDB loan with a tenure of 25 years and a maximum LTV of 80%.
This means over a period of 25 years, you will need to repay $418,000. The interest rate for an HDB loan is 2.6% p.a. The estimated monthly loan repayment for this home loan comes out to be around $1,897. Now let’s see how the loan tenure affects the monthly loan repayment.
|Loan tenure||Monthly loan repayment|
As you can see, reducing the loan tenure results in increasing the monthly loan repayment. This can result in you taking up personal loans eventually exposing you to much higher interest rates.
Always keep one thing in mind that having enough cash flow in day-to-day life is always better than having less remaining home loan amount.
If you ever lose your current job or have to take up a low salary job (even if it’s temporary), the higher monthly repayments would mean a much higher risk of failing to service the home loan.
Another good thing about taking up a longer loan tenure is the flexibility granted in your repayment options. Depending on your current financial situation, it allows you the opportunity to decide if you want to make more repayments when you have additional funds.
For example, in longer loan tenures, you can also repay home loans early and save on interest if your earnings have increased over the years. This is ideal for HDB loans which do not come with early repayment penalties.
On the other hand, it can also be forgiving if you suffer a loss of a job or anything that results in being unable to make monthly repayment at the right time.
Please note that banks and financial institutions do not easily allow you if at all possible, to adjust from a short loan tenure to a longer loan tenure.
Having a longer loan tenure means you will be paying a lowered home loan monthly repayment through the period. This means your home loan does not take up as much of the TDSR limit, thus freeing up space within your TDSR limit on other home loan repayments.
So, if you are planning to buy your second, third and subsequent properties, a lower gross monthly repayment amount will benefit your TDSR limit.
Moreover, the COVID pandemic and uncertainty of the global economy today have made us learn the hard way that life is unpredictable and get can in the way of our most well thought out plans.
The market interest rates do fluctuate and any sharp increase can render you financially vulnerable. A longer loan tenure will serve as a safety net in such unprecedented times.
One thing is clear by now that both shorter and longer loan tenures have their own benefits and there is no need to rush into changing your current loan tenure. Only after taking your financial situation and repayment capability into account, a decision to choose longer or shorter mortgage tenure can be made.
One thing to highlight here is that most people are unaware that when refinancing their home loan, besides the interest rates, they can also review and choose to increase or decrease their loan tenure. Let’s understand why loan tenure is an important thing to consider when refinancing.
One common way to adjust monthly repayments of loans according to your financial circumstances is refinancing.
You can increase your monthly loan repayments to shorten a 30-year loan to a 15-year loan if your income has increased in the last three to five years. You can certainly refinance to a shorter loan tenure as soon as your mortgage lock-in period gets over if you feel capable enough to pay higher monthly repayments and get away with the burden of debts.
You can also lower your monthly repayments to ensure a smoother cash flow by increasing your loan tenure.
Having said all this, there is no right or wrong answer when it comes to choosing between shorter or longer home loan tenures. Ultimately, it would be best to decide on a home loan tenure based on this question: What can you afford?
Buying your own home does not need to be a bane if you know what would work best given your financial situation. Hopefully, these pointers will be useful for prospective homebuyers to assess their own standing and preferences.
If you are still not sure if you should choose a shorter or longer loan tenure, please don’t hesitate to get in touch with DollarBack Mortgage where our expert mortgage consultants can advise you about what should you do depending on your financial situation.
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