While there are a lot of us who would try to stay away from debt, I would reiterate again that not all debts are bad.
Some examples of really, really nasty debts are credit card debts, loans you get from the pawn shops or even the inhouse loans that are offered in some retail store.
Hence, before you plan to shorten your loan tenure, do read the article below before making the decision
Let’s compare the difference for a $750,000 home loan at 1.3% interest per annum.
Difference in the savings
Taking a shorter home loan seems to be better as we probably rather pay a higher monthly mortgage than paying interest to the bank.
From the example above, we could clearly see the savings that you are able to achieve when taking a smaller loan.
However, why am I advocating to stretch your home loans as long as you can?
There are a few reasons why stretching your home loan may be a better choice.
1) Total Debt Servicing Ratio (TDSR)
Total Debt Servicing Ratio is being brought up again! Since the Monetary Authority of Singapore has restricted borrowing up to only 60% of our monthly gross salary, we must be prudent on our debts.
Shortening our home loan tenure and taking up more monthly mortgages restricts us from taking other forms of loans. The reason is that a portion of the 60% has been used up by the home loan. Therefore, stretching the home loan tenure might be a better idea.
To learn more about TDSR as well as Mortgage Servicing Ratio (MSR), click here.
2) Optimal Cash Flow
We all want to clear our debts fast. But would you risk having a terrible standard of living in order to clear your home loans quickly?
Paying higher monthly mortgage locks up our cash into the property. Money paid for a mortgage is illiquid. We would have to sell or refinance our house in order to unlock it in times of need.
Therefore, we should stretch our home loan tenures.
3) Mortgage Insurance
Mortgage insurance is an insurance policy that protects us. Should something bad happen, the mortgage insurance is there to help us with our mortgage repayment.
Therefore, it would be wiser for us to stretch our loans so that we would have the savings to sustain us, instead of shortening our home loan tenure.
4) Opportunity Cost
If you were someone who was well off, TDSR and optimal cash flow would not be an issue for you. You would think that it would be a good idea to shorten your home loan tenure. However, it actually wouldn’t be due to the lost opportunity cost for locking our money in the property.
Let’s compare between a 15 year & 30 year loan
Difference in Monthly Mortgage: $4,588 – $2,517 = $2,071
Difference in Total Interest: $156,133 – $75,905 = $80,228
To save $80,228, we are paying an extra $2,071 monthly for our property.
If we are to take the 30-year loan and invest the difference of $2,071 monthly at a return of 5% per annum. We would have a total of $1,651,138 at the end of the 30 years. That beats saving $80,228.
Therefore, after reading through this article, would you still take a shorter home loan tenure, or has this blogpost convinced you otherwise?
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