In Singapore, taking on a home loan is probably one of the biggest financial commitments most will make. And growing up, a common piece of financial advice we'd receive is not to have debt which leads us to question, "Should I pay off my mortgage early in Singapore?" But unless you’re rolling in dough, it’s difficult to avoid taking a loan for big-ticket items.
When the economic effects of the COVID-19 pandemic were felt by families in 2020, the number of families who faced difficulty with home loan payments increased. Nearly three times more households requested and got help repaying their mortgage. At the end of last year, MAS has also warned Singapore households on rising household debt, in light of the likelihood of gradually rising interest rates in 2022. This probably cemented the opinion, “Wah, if I can pay off my home loan, it’s better to do so as quickly as possible.”
After all, there are few things more relieving than knowing you’re debt-free and the roof over your head is fully paid for. However, is it always better to pay off your home loan ASAP? We weigh the pros and cons for you to find out.
Want to save more on your home loan? Compare the best mortgage rates on PropertyGuru Finance, or contact us for more personalised advice and recommendations:
Should I Pay off My Mortgage Early in Singapore? Pros and Cons
If you’ve no time to read this article because you’re hurrying off to pay your mortgage, here’s the “too long, didn’t read” version of the pros and cons.
You pay less interest and save in the long run
You’ll have to pay a larger sum monthly which means you have less liquid cash for daily expenditures and emergency funds
You could escape rising mortgage interest rates
You’re locking away money that can be used to invest at an interest rate that’s higher than your bank’s interest rates
You could improve your credit score by paying off your loan quickly (if you’re trying to take more loans)
You might incur pre-payment penalties
Pros: The Sooner You Pay off Your Mortgage, the Less Interest You Fork Out
It’s a no-brainer: the more quickly you pay off your mortgage, the less interest you pay.
For instance, if you want to upgrade from an HDB flat to private property. To finance your purchase, you take a $1 million loan over a 30-year loan tenure from the bank. Let’s also assume the interest rates stay at 1.6% per annum throughout the loan.
If you’re like, “Nah, I want to pay off the loan a whole ten years earlier.” Going back to our calculator, for the same loan over a 20-year tenure, your monthly instalment will be $4,872 but you only pay $169,179 in total in interest.
You effectively save a cool $90,602. It’s a “no sh*t, Sherlock” moment when we say that’s a lot. However...
Con: You Have Less Cash for Daily Expenditures and Emergency Savings
Paying off your mortgage more quickly usually means putting more into your monthly instalments. In the above calculation, you’re paying $1,373 more per month, if you choose to pay your loan in 20 years, instead of 30.
This is fine if you have a significant amount of savings and earn enough to have money to spend for emergencies. The problem comes when you have little savings and not a lot left over after spending the bulk of your monthly income repaying your mortgage.
The best-case scenario is you may have to significantly adjust your lifestyle and think twice every time you want to treat yourself. You have to be tighter with your purse strings and may sacrifice your quality of life.
But if you are unexpectedly retrenched or fall sick, you might find yourself short on emergency funds you can dip into. Worse still, you have to continue paying your monthly instalments. That’s why maintaining liquidity is important.
Consider: there’s no real rush to complete your home repayment. We understand the relief that comes with being debt-free. However, hastily jumping into a payment plan with higher instalments might only exacerbate your anxiety if you’re living hand to mouth.
It’s only safe to pay a larger amount if you’re sure you have a sufficient buffer of at least six months worth of expenses.
Related article: Does It Make Sense To Pay Off Your Home Loan In Full?
Pro: You Might Be Able to Escape Rising Interest Rates
Home loans are a huge financial commitment you’ll probably spend decades paying off. But of all loan types, home loans have the lowest interest rate. The effects of the COVID-19 pandemic have kept interest rates at an all-time low. A quick search on the PropertyGuru home loan page shows interest rates starting from 0.92%!
But good times won’t last forever and what goes down must come up. When and as the US economy recovers, interest rates will likely rise too. We're already expecting interest rates to gradually rise in 2022 and beyond. This is why MAS uses a rate of 3.5% when computing things like your Total Debt Servicing Ratio to buffer for increases.
If you can pay off your home loan ASAP, you reduce the possibility of encountering high interests rates later in your loan.
Speaking of interest rates, if you’re having trouble cross-comparing rates across banks or deciding which is the best loan to take, speak to our home loan advisors. They’ll provide you with tailored advice so you can make the best home loan decision, at no cost!
Con: You’re Locking Away Money that Can Be Potentially Used to Invest
By paying a higher mortgage, you’re depriving yourself of the ability to invest your cash into something which could potentially give you a higher rate of return. If you play your cards right, you could make enough to beat your home loan.
Of course, there’s no guarantee for anything in life. Still, a financially savvy individual will know the importance of diversifying income streams. And that freed up cash can do just that for you. You could always seek the help of a financial professional on how to invest your money.
For those who are unconvinced or risk-averse, you could just let your money sit in your CPF. The 2.5% interest from your Ordinary Account and 4% from your Special Account is already earning more moolah. The high interest rates afforded to your CPF accounts is also another reason why some may say you shouldn’t use your CPF to pay off your home loan.
And if your mortgage is insured, there’s even less of a case of paying your home loan ASAP. The common train of thought is if you pay your mortgage quickly, you minimise the risk of your house being repossessed by the bank if you’re unable to pay the instalments.
What mortgage insurance does is cover you by handing a cash payout should anything unfortunate happen. This will cover your repayments and result in an extremely low risk of you defaulting on your loan. So if something does happen, you’re good!
Pro: If You Need to Take On Another Loan, You Could Improve Your Credit Score And/Or Increase Your Loan Quantum
There are a few good reasons why you might want to pay off your loan early and they usually involve taking on another loan. Perhaps you’re ready to purchase another home and your existing loans are affecting the maximum loan quantum you’re able to obtain.
For banks, you’re given a Loan-to-Value limit (LTV) of up to 75% for your first mortgage. One factor that affects how much you’re able to borrow is the number of outstanding loans you have. For loan tenures 30 years or less (that ends before you’re 65 years old), this is how much you’re able to borrow.
Number of home loans
Minimum cash downpayment
Up to 75%
Up to 45%
3rd or subsequent mortgage
Up to 35%
You could be a business owner or someone intending to pursue further studies and wishes to take a personal loan. Whichever the case, paying off your loan can improve your credit score and increase your chances of getting a new loan approved.
Con: You May Incur Prepayment Penalties
Depending on your current mortgage terms, you may incur prepayment penalties when you pay off your loan early. Banks usually charge this fee to compensate for the lost interest, which is typically 1.5% of the amount you’ve pre-paid for.
If you do find yourself in a financially secure spot and wish to pay off your loan more quickly, don’t pay it off at once. Try refinancing instead.
Related article: Refinancing Your Home Loan: 3 Steps to Identify the Right Time
For those who have an existing bank loan, this is one instance of when refinancing makes the most sense. Take advantage of the currently low interest rates now to save. This couple managed to halve their interest rates by refinancing!
So, Should I Pay off My Mortgage Early in Singapore?
There is no straight “yes” or “no” answer if you should pay off your home loan as soon as you can. But if achieving financial freedom is the main goal, it’s important to understand the difference between good and bad debt. This way, you’ll know how to make your money best work for you.
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More FAQs about Paying off Your Mortgage Early in Singapore
Should I Pay off My Mortgage Early in Singapore?
There’s no right or wrong when it comes to paying off your home loan early, as it depends on your financial circumstances. One thing to look out for is if you may incur a prepayment penalty!
What Happens If I Pay My Home Loan off Early?
You become debt-free more quickly, but depending on your loan’s T&Cs, you might incur charges. While this sounds good, know the process of paying off your home loan early may not always be the most financially savvy move.
Why You Shouldn't Pay off Your House Early?
Some reasons not to pay your loan off early include having more liquid cash to invest and having a bigger budget for your daily expenditure.
This article was written by Cheryl Chiew, Digital Content Specialist for PropertyGuru. Cheryl likes bread and cats, especially when cats tuck in their limbs so they look like bread. Drop her an email that hopes to find her well at firstname.lastname@example.org.