Every property owner in Singapore must have had the perennial question lingering when it came to their mortgages – to pay down or not? There are various factors to consider when thinking about how to tackle this age old issue but a few simple points as detailed below help to provide clarity.
Did You Know? According to OCBC Bank’s latest Financial Wellness Index 2020 survey, 55 per cent of millennials (aged 21-39) are concerned about not being able to afford a house for their own stay. Almost 38 per cent (four in 10) individuals who already have mortgage loans have problems paying off loans on time.
Prepaying your home loan has some benefits. Prepaying loans itself is like investing. Where you could save a lot of funds on your interest by prepaying your loans early, it helps diversify your investable funds by using your saved amount in varied investments, which will generate an assured income.
Furthermore, if you sell your house, it frees up part of your accrued interest. Prepaying your loans in simple terms means that instead of making your mortgage payments loyally every month, you pay some of it beforehand.
Let’s put this in simpler terms, assuming you have a mortgage of $500,000, interest of 2.5% with a remaining loan tenure of 20 years. You have spare funds of around $50,000 available which you are deciding between paying down your mortgage or investing at a yield of 3.5% per annum for 20 years.
Total saved over 20 years: $63,600
Total earned over 20 years: $85,000 (including principal)
The clear winner is apparent which shows that if you have an investment option which gives a higher interest than your mortgage, it is always a good idea to invest rather than paying down your mortgage.
By paying your home loan early, you would eliminate interest payments, which will result in lesser cash required to meet monthly expenses and save you a healthy amount every month. Assume that you’ve accumulated the right amount of savings and would like to settle it towards paying off your mortgage.
For example, if you took a home loan of S$500,000 for 20 years. You would be paying S$2,649 every month.
Now, if you made a one-time payment of S$30,000 against your home loan, you would be paying S$2,2490 every month.
That would save you around S$160 every month, which accumulates to $38,400 over 20 years.
That is money in your pocket instead of to the bank!
Therefore, yes, it is worth paying your mortgage early if you have spare funds without any good utility for them.
Although saving on your mortgage payments by making a lump sum payment towards your home loan does have its benefits, there are some situations where it might not prove to be your best decision. If paying your loans early will deplete your savings, you shouldn’t hasten to pay off your housing loan. It’s not a very good idea to spend all your cash in a home loan and tie yourself up financially because it’s hard to convert equity from your property into cash in times of unexpected financial challenges, such as a loss of income or a medical emergency.
Also, it might not be wise to prepay your mortgage loans with relatively low-interest rates first when you have other debts with higher interest rates, such as credit card debt.
Similarly, if the penalties imposed by your bank for an early prepayment negate interest savings gained by paying your loans early, you might not want to go for that option.
Mortgage insurance is one more reason to think twice before preparing your investments. If you are covered under mortgage insurance like Mortgage Reducing Term Assurance (MRTA) or Home Protection Scheme (HPS) for HDB properties, your loan will be paid off in situations like death, terminal illness, or disability. Thus, extra savings that you have accumulated at present will help to support yourself or your loved ones when it is needed the most.
When you replace your existing home loan with a new home loan from another bank, it is called refinancing. In Singapore, home loan refinancing is a quite popular financial move by borrowers, mostly after the lock-in period of the existing home loan. While refinancing, you have an option to change to another home loan with a shorter loan tenure or reducing your interest rates.
Let’s use the same example as earlier where you have an outstanding mortgage of $500,000 at an interest rate of 2.5% and a remaining tenure of 20 years. Your monthly instalment would thus be $2,649.
You choose to refinance to Bank B with a lower interest rate of 1.80% keeping the remaining tenure the same at 20 years. Your monthly instalment would then be $2,482.
The monthly savings you will enjoy would be around $167. Over the 20 year tenure, your total savings would then be $40,080.
Let’s take a step back and compare the refinancing option vs paying down your mortgage loan as indicated earlier.
Upfront costs: $0 (Banks usually provide subsidies to cover your legal and valuation fees)
Total savings: $40,080
Prepaying your mortgage,
Upfront costs: $50,000
Total net savings: $13,600 ($63,600 – $50,000)
There we have it, prepaying your mortgage in Singapore should be your last resort if there is no investment option which can yield you a higher interest than your mortgage or if refinancing your mortgage brings about close to no savings.
Not sure about how to refinance? Find out the tips for a housing loan refinancing.
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