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Pros and Cons of Repaying Your Mortgage Earlier

Before buying a property, you might need to use housing loan calculator to calculate the amount of housing loan you can get. After getting the loan, it is not uncommon for some people to want to pay off their home loan early. Whether it is due to concerns about interest rates, or just a desire to be debt free, many people do shave 5 or even 10 years off their loan tenure. But before you decide to go ahead and do this, there are some pros and cons to take note.

Pros of repaying your mortgage early

1. Lesser interest you ultimately pay

Imagine if you have taken a loan of $1 million, over a 25-year loan tenure. There will be an assumption of an interest rate of around 2% per annum, throughout the duration of the loan. The total interest repaid, over 25 years would be $271,563. The monthly repayment is $4,239 per month. Now, if you wish to speed things up by refinancing, and making it a 20-year loan. Your monthly repayments go up to $5,059 per month. However, your total interest repayments will be reduced to $214,120. Shaving 5 years off the loan tenure saves you $57,443, or $11,488.60 per year. This is a large amount, which you can use to invest elsewhere for retirement.

2. Lesser anxiety

There is a big psychological advantage in paying off the home loan earlier. You will know that you can retire well, as paying off the home loan means you would not be burdened with debt in your later years. If you are paying off the home loan in one lump sum, you could be removing decades of debt repayment. You will find it is easier to take opportunities such as setting up your own business.

3. You can escape the expected rising interest rates

Home loan interest rates have been at historical lows since 2008, after the Global Financial Crisis. However, interest rates have been steadily rising. Remember that the historical interest rate for Singapore home loans is close to 4%, and the current low rates are a quirk. If you can pay off your loan sooner, you would not have to deal with the high rates that lie ahead.

4. More security for your family

If you are the sole breadwinner of your family, paying off your home loan earlier might mean more security for your family. For example, if you are suddenly unable to work for some reason, but your home loan is already or paid off, your spouse and children would not be forced to take on the debt. But this is not a clear-cut matter, as it is sometimes more financially wise to retain cash savings, while relying on Mortgage Reducing Term Assurance (MRTA) to pay off the home loan in emergencies. Speak to a financial adviser, as this varies greatly between family situations.

5. You may have access to Cash Out Refinancing

If you have a fully paid-up private home, banks may allow you to use Cash Out Refinancing. This is a loan that uses your home as the security. Singaporeans can Cash Out Refinancing to borrow up to 50% of their home value, without having to meet restrictions like the Total Debt Servicing Ratio. Not only does this allow you to borrow substantial sums, the interest rate is also super low. It might only be around 1.6% per annum, much lower than the rate at which your CPF savings accumulate. The Cash Out loan may also be large enough to pay off all your other debts at once, such as your personal loans, credit card loans and car loan. It would combine all these high-interest debts into a single loan, with the super low rate of just 1.6% interest.

Cons of repaying your mortgage early

1. It is dangerous if it leaves you without savings

Never rush your mortgage repayment, if it would wipe out your savings. You should always retain sufficient cash for rainy days or at least enough to cover at least six months of your expenses. If you use all this money to rush your loan repayment, you would not be able to cope with financial crises such as sudden retrenchment, lawsuits, or medical costs which are unforeseeable.

2. There are prepayment penalties for bank loans

If you are using a bank loan, seriously consider refinancing into a shorter loan tenure, rather than paying it all off at once. This is because most banks enforce a prepayment penalty, to make up for the lost interest. It is commonly around 1.5% of the amount being prepaid. There is no point forking out the prepayment penalty, if it would wipe out most of the savings from paying less interest. If you are using an HDB loan however, there is no prepayment penalty.

3. It is financially imprudent if you have other, higher interest debts

If you have other debts, such as personal loans or credit card loans, these should be paid off before partial or full repayment of your mortgage. At around 1.8% to 2% per annum or 2.6% for HDB loans, your mortgage is the cheapest loan you are likely to have. Your credit card loans compound at around 26% per annum, and your personal loans at 6% to 9% per cent per annum. As such, any spare cash should be used to settle those debts before the mortgage.

So we have pros and cons of repaying the mortgage. So choose wisely . Hope this article helps you in buying a home or property.

Marsha
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