Updated: May 8, 2020
Having a zero-debt life is something that many Singaporeans work towards. Without any debts under their name, they will be able to feel less burdened and more carefree. But is this really true? Does paying off a loan really bring about an untroubled (financial) life and make you more responsible as a person? Read on to find out the reasons why you should not rush to pay off your home loan.
For most bank home loans (except HDB loans), there will be pre-payment penalty – an amount that you need to pay to the banks when you repay your home loan in advance. Most banks charges 1.5 times on the undisbursed loan amount as the penalty rate. If the interest rate is lower than the penalty, you should definitely not pay off your loans early.
Mortgage loans tend to be cheaper to pay off than other higher interest debts, such as credit card loans, car loans, or personal loans. Taking credit card loans as an example, it has an average interest rate of 26.5% while the interest rate for most home loans is less than 2%. It is only logical to pay off the credit card loan since it has a higher interest rate than the home loan.
For the investors, this is even more of a reason to not pay off your home loan hurriedly. This will cause you to miss out on the investment opportunities, which might allow you to gain more returns. Home loans’ interest rates is at a maximum of 2.6% (for HDB loans; as of writing). If you are taking up non-HDB loans, putting the spare cash that you have in your CPF account (interest rate up to 3.5% for Ordinary Account) will allow you to gain more than paying off the loan. Therefore, if you have a way to invest the amount to generate better returns, it will be better to do that than to pay off your loans within a shorter period of time.
It is important to plan ahead and know what you will be purchasing, especially for big purchases such as car, wedding, home renovation, or vacations. This will prevent you from having to take up another loan or to reduce the loan amount in the event where you need to purchase these items. Despite all that said about it not being a good idea to pay off your home loan early, it still largely depends on each individual. For some, paying off might give them a sense of security and they do not have any other loans. For others, paying off a loan early might make them cash strapped. There is no correct answer as to how long you should take to pay off your home loan – you should understand your own needs and consider all options before choosing to repay your home loan in advance or not. Contact Mortgage Consultancy now to get the smartest financial bank loan advice specifically for your home. We are able to provide more than 100 loan packages from 16 banks for you to compare and choose from! Feel free to contact us at +65 8556 5271 so that we will be able to help you make an informed decision, suited to your needs.