Paying off your home loan early in Singapore? Read this before you make your decision.
Having debt from loans can be stressful, so it’s understandable if you want to pay it off as soon as you can. However, before you pay off any outstanding debt, keep in mind that you may be charged to pay it off and, in some cases, the money might be better spent on an investment. To help you decide whether now is the right time to pay off existing debt, check out our top things to consider when paying off your loan.
This article is contributed by ValueChampion, a personal finance research firm.
Do: Know How Much The Early Repayment Fee Will Cost You
Depending on which loan you have taken out, you will have to pay a fee to repay the entire loan. Most loans, whether it is a personal loan, car loan, home loan, or others, will charge a fee to repay the money in full. This can cost you an additional S$100 to S$1,000, or 1-3%. If you have only a few months left, then repaying your entire loan might adversely affect your finances. In that case, it might be better to partially repay the loan and reduce your monthly installments.
Do: Consider Investing the Money Instead of Repaying the Loan
In some cases, like for home loans, allocating a portion of the money you would use to pay off the loan can be better spent on investments. For instance, if you decide to invest with an online brokerage that offers low fees, you could earn 5-10% in annual returns.
If you are more risk-averse, you could consider investing in state-backed bonds or bills. These are government-backed and offer reasonable returns. For instance, Singapore Savings Bonds have an annual average return of 0.90% for 10 years. Singapore Government Bonds, on the other hand, yield up to 3.375% per year depending on their maturity date. For government treasury bills, which last 6 months to a year, you can expect to see annual returns of 0.19%-0.27%. Depending on your interest rates, investing could earn you more than what you spend on your monthly payments.
Comparison of SSBs, SGS Bonds, and T-Bills
Do: Consider Refinancing Your Home at a Lower Rate
In 2020, nearly 10% of Singaporeans said they needed a loan to pay off their existing debt. If the interest rates are significantly lower than your current loan, this could be a good idea. For instance, you take out a debt consolidation loan (DCL), which aggregates your existing debt into one larger loan. If your DCL, which has an average EIR of 6.50%-10.50% p.a., has a lower interest rate than your previous loan, you could save hundreds on interest. Even more, paying off this debt will help raise your credit score.
If you have a mortgage, refinancing your loan could lower your interest rates and monthly payments. However, consider the breakeven point before doing this. This is essentially the upfront costs of refinancing your home loan, divided by the monthly savings you would make. For example, if you have to pay S$2,000 to refinance, but you would save S$200 a month, it would take 10 months before you start saving money on your repayments.
Paying off Your Loan Can Be a Relief, but Only if It Won’t Cost You Extra
If you have an upcoming expense like going to college or buying a house, then it may be better to hold off on paying off your loan. However, if paying off your loan makes financial sense, it can relieve stress and give you financial freedom and security to pursue other ventures. As long as you’re aware of the early repayment fees, whether the money is better spent on investment, and the interest rates available for an alternative loan, you can make a well-informed decision.
This article is contributed by ValueChampion, a personal finance research firm that helps people make smarter financial decisions. Their experts have been featured in several major publications including CNN, CNBC, New York Times, The Straits Times, USA Today, and more.