Should I Pay Off My Home Loan Earlier?

It is common for many people to want to repay their home’s mortgage early or before its loan tenure is done. The simple reason for this could be: to be able save on the interest rate or just to be able to become debt-free finally. Indeed, many debtors make it their aim to cut five up to as much as ten years off of their loan’s tenure and also succeed in it.

Before you decide to make this your goal as well, consider the following advantages and disadvantages of repaying your mortgage before its loan tenure is up.

Advantages and Disadvantages of Repaying Your Home’s Mortgage before the End of Its Tenure

ADVANTAGES:

1. The sooner you are able to pay off your mortgage, the less interest you will pay.

On the other hand, if you speed up your repayment via refinancing and pay off the loan within a shorter loan tenure, your monthly repayments would become higher per month but the total interest repaid will decrease. Cutting a few years off of your loan’s tenure can save you quite a lot of money which is an amount that is substantial enough to use for investing in something else important, say, for your retirement plan (equities, endowment funds, etc.)

2. You can avoid the inevitable rise of loan interest rates.

Between year 2009 to 2017, home loan interest rates have been at their lowest, but right now, interest rates have begun to climb back up steadily again.

If you are able to pay off your home’s loan the soonest that you can, then you would not have to deal with paying higher interest rates later on.

3. You may use Cash Out Refinancing if you pay off your home’s loan early.

Another advantage of a fully-paid up home loan is that banks will also allow you to access “Cash Out Refinancing”. This is a type of loan that lets you use your home as collateral.

Through Cash Out Refinancing, some people can borrow money up to fifty percent of their home’s value WITHOUT restrictions like Total Debt Servicing Ratio. And not only that, aside from letting you borrow a significant sum of money, the loan’s interest rate is also very low, much lower than the annual rate that your CPF (Central Provident Fund) savings can accumulate.

You can then use your Cash Out loan to pay off all your other loans combined, such as your credit card loan, car loan, and other personal loans, in just one go. This consolidates all of your high-interest debts into just one loan at the lowest rate.

4. Paying off your debt saves you from anxiety.

There is also the psychological benefit of paying off your home loan early.

Being able to pay off your biggest loan right away means you will not be burdened by debt most especially in your later years.

If you are able to repay your home loan in just a few years or in just one lump sum, then it could save you decades-worth of debt repayment. You can retire well and even find it easier to take on new projects or opportunities, such as building your own business or taking a career jump, knowing that you are not held back by a major loan.

5. You get more security for you and your family.

If you are your family’s breadwinner, repaying your home loan earlier than its

due will make you more financially secure in the long term.

For instance, if you are suddenly unable to work but your home has already been paid off, then your spouse or children would no longer have to take on paying off your debt on your behalf.

DISADVANTAGES:

1. Repaying your loan within a shorter time period can leave you with no savings.

Do know that rushing your mortgage repayment could also wipe out all your savings or your opportunity to save more. As a rule of thumb, you should always have sufficient cash savings to cover at least six months of your total expenses in case of unforeseen events.

If you use up all your money to rush paying off your loan, then you would not be able to cope with family emergencies or personal crises. Yes, you may be well insured but a family member may not be, so you better be prepared in case a financial emergency happens.

2. It is not financially-wise if you have other high-interest debts to pay as well.

If you have other loans to pay like a personal loan or a credit card loan, then you should pay these off first (at least) before partial or full payment of your mortgage.

Your home mortgage is actually the cheapest loan you can have so it is better to prioritise the other higher interest loans that you have. A credit card loan can compound to around 24% - 28% per annum and a personal loan can compound to around 6%-10% per annum. Thus, it is much more prudent to use any spare cash you may have to settle those debts first before repaying your mortgage.

There really is no point in paying off your home loan early but then be forced into a higher-interest debt because you did not foresee the cash flow issues you may have unless, of course, you are able to get Cash Out Refinancing for your other loans.

3. Most bank loans have pre-payment penalties.

If you loaned from a bank, it is better to refinance your loan into a shorter time tenure instead of paying it off all at once. The reason is because most banks enforce a pre-payment penalty in order to make up for the interest they lost. This is commonly around 1.5% of the total amount that you prepaid.

Note, however, that some banks do not have prepayment penalties if your prepaid sum falls under a certain amount. Make sure to check with the bank first before getting a loan.

There is also no pre-payment penalty if you are using an HDB (Housing and Development Board) loan.

It really is no good to spend more money on the pre-payment penalty than to save more from paying a much lesser interest rate for repaying your loan earlier.

4. You can lose out if you use your money to pay off your home loan instead of investing it.

It is much better to invest your money if the acquired earnings can outpace your mortgage’s interest rate.

For instance, if you invest in a profitable equity portfolio that gives you a return of 5%-7%, you can easily outpace your loan’s interest by 2%. It is better to spend money on such investments than using it to pay off your mortgage right away as you would also be gaining some capital to buy a small asset.

Also note that even CPF (Central Provident Fund) interest rate can outpace a bank’s mortgage by 2.5% per annum (and by as much as 4% for a CPF Special-type Account).

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