Tips To Help You Save On Your Mortgage Interest in Singapore

To save on their mortgage interest, some people try to cut down their expenses while others opt for an allegedly better way: refinancing their home loans.

Before you take the plunge, weighing the different options is crucial to help decide what makes sense for your current financial situation, and how much can you actually save. You should learn whether you should pay off your mortgage early, refinancing, reducing your loan tenure or offsetting your interest from other investments by weighing down its potential pros and cons.

This article will help readers learn how to save on their mortgage loans and make the best use of their hard-earned money.

How can you reduce the amount of mortgage interest you pay?

When you borrow money as a mortgage from a bank or any financial institution, you are expected to pay the funds back over time. To compensate for the risk your lender takes by lending you money, you will have to pay back the loan amount plus interest.

The interest you pay on a loan mortgage can cost hundreds or thousands of dollars per year. Getting even a slightly lower interest rate than your current rate (which you will likely get when you refinance) can make a substantial difference in the long term.

Most people choose to refinance their loan for a lower interest rate as it will help them reduce the total interest payable and increase the rate at which they build equity in their home. Refinancing lets you lower the size of your monthly repayments and long-run interest costs by lowering your mortgage interest rate, thus reducing the overall cost of your loan.

But there are other ways to lower your interest rate and lower your total interest payable. Below we have discussed some of them in brief.

1. Higher downpayment

You must pay at least 5% to 25% of the property price as a downpayment depending on the property type. However, you can also pay more initially. The higher the downpayment you make, the lower is the outstanding loan amount, which translates into reduced total interest payable at the end of the loan tenure.

2. Partial repayments

One way to reduce interest payments is to make lumpsum partial capital repayments at regular intervals on your outstanding loan amount. Note that it is suggested to make partial repayments in cash instead of CPF if cash flow is not a problem.

3. Reduce loan tenure

If your financial situation has improved over the years and you are now capable of making a bigger payment each month, then you should consider increasing your monthly mortgage repayments or reducing the loan tenure in order to save a lot of money on overall interest payments.

4. High-return investment

Find an investment that offers higher interest rates than their existing mortgage loan. With high returns on investment, you can easily offset the interest paid for the loan.

Should you refinance to reduce your mortgage interest?

Home loan refinancing means replacing your existing home loan package with another bank, often for a lower interest rate. For example, if you are an HDB owner who is repaying the HDB loan at an interest rate of 2.6%.

If you refinance to a home loan package where a bank offers a 1.8% interest rate, you will likely be saving a lot of money, depending on the remaining loan tenure and balance amount.

When refinancing your home loan, you are basically trading in your existing loan for a new one. Once your new lender approves your application for a refinancing loan, they pay off your existing loan, ending your relationship with your old lender.

You are now left with just one home loan and one monthly repayment to make. In return, your new mortgage lender has an incentive to offer you a lower rate and gain your business.

Note that you can choose to refinance or reprice a home loan – which essentially means staying with your current bank but with different loan terms and conditions. Although the end goal remains the same in both cases: get a home loan package with reduced interest rates and save more money.

The refinancing process involves some upfront costs, including administrative fees, legal & valuation fees and so on. The good news is that some banks offer some form of subsidies or cashback to get away with these costs if your home loan amount is large enough.

People often choose to refinance their home loan if they want to switch to another loan type, for example, from floating to fixed rates or vice versa, depending on the interest-rate environment. By doing this smartly, they can take advantage of the reduced interest rates.

Also, refinancing a home loan helps people adjust their loan tenure. Depending on their financial condition, they could choose a longer loan tenure (smaller repayments but higher interest costs) or a shorter one if they think they can pay off their home loan quickly by putting more into monthly repayments. Some people refinance their home loans to make use of their home equity.

Is prepaying your mortgage a good idea to reduce interest as well?

Prepaying your loans simply means choosing to pay your mortgage in part or full beforehand instead of making mortgage repayments faithfully every month. A lot of homeowners would want to ask – is it really a good idea to pay your loan early? Well, it depends. Let’s understand how.

When you prepay your home loan, you reduce your monthly interest payments. There are few things more relieving than knowing the home you are living in is debt-free. On the other hand, this also means that you will be putting more into your monthly payments.

The problem arises if you have little savings and not much is left for your daily expenditure and/or emergencies after paying off your monthly mortgage instalment. As a result, you will have to make significant changes to your lifestyle and sacrifice your quality of life.

If you are capable enough to pay off your home loan early, you can take advantage of low-interest rates when encountered during the loan tenure. One of the most recent examples of such a situation is the COVID-19 pandemic, where the interest rates went at an all-time low.

Part prepaying your home loan could be one of the best things you can do if you have received a windfall of cash or saved a sizeable sum of money.

However, if you have any investment option where you can potentially get a higher rate of return (than a CPF account) than your home loan interest rates, investing your money could be a better choice over prepaying your loan.

Although prepaying your home loan can have a lot of benefits, you may still incur early repayment penalties. If you pay off your loan ahead of agreed loan tenure, banks often charge a prepayment penalty fee to pay compensation for their potential loss of profit.

The penalty fee is usually 1.5% of the remaining loan balance, which could turn out to be a significant value depending on the total loan amount taken.

Prepay home loan vs new investments

As a rule of thumb, in Singapore, it is better to invest your money, instead of prepaying your home loan, if the post-tax return from your invested money is likely to be higher than the effective cost of the home loan. For example, say if your home loan interest rate is 2.5% and you have a low-risk investment option that can yield a post-tax return of 3.5%, you might just be better off investing the money elsewhere.

Usually, it is not difficult to acquire returns that outpace a home loan interest rate that typically varies between 1.2% to 2.5%. Ever wonder why even billionaires take home loans?

If you have upcoming expenses like the home renovation or going to college, then you may not want to prepay your home loan. However, if paying off your loan can relieve stress and give you financial freedom and confidence to pursue other ventures, it might make sense.

But don’t rush to pay off your mortgage…

The idea of rushing to pay off your mortgage seems flawed if it comes at the expense of wiping out your savings or emergency funds. You just can’t have no cash on hand for emergencies like high medical bills, job loss, etc. because you wanted to speed up your mortgage repayment. You can’t undo the payment you have already made to the lender.

Often, in such situations, people resort to undesirable alternatives like taking up a personal loan with a very high interest rate, downgrading the flat, or even renting out rooms. If you don’t have funds that could suffice your expenses for at least six months, it is imprudent to rush into home loan repayment.

Some homeowners may rush to make their home loan repayment because they don’t want to leave any outstanding loan for their family in case of any unfortunate incident like death or permanent disability. However, you don’t need to rush repayment for such concerns, instead just insure your mortgage. Your mortgage insurance will handle any outstanding loan after you pass away.

Final Thoughts

Ultimately, the choice of whether to pay off your mortgage early, refinance, or invest your money depends on your personal preferences and financial condition. If you are not able to make a decision, consider getting in touch with one of our mortgage consultants at DollarBack Mortgage. They can suggest you the best home loan rates and figure out whether refinancing can help you save more in the long run.