- June 12, 2019
- |Legal Moneylender
- 0
If you have a mortgage on your home, you have probably wondered whether it would be worthwhile to pay ahead of schedule. If so, you are not alone. The debate over prepaying your mortgage has persisted in the personal finance world over some time now, and it is not going away any time soon.
You have leaped and decided to purchase a home. After signing a plethora of paperwork, you are now the proud owner of your own house. Thirty days later, when the first loan payment comes due, you are hit by the reality of what you have done. You have taken on 30 years’ worth of massive debts, in an economy that makes no promises about long-term job stability.
In this article, we will look at the benefits of paying off your mortgage as soon as you can and let you decide if it’s the wise thing to do.
Pay It Off: Benefits
-
The sooner you pay, the less interest is accrued
Say you borrow a loan of $1 million, over a 25-year loan tenure. We assume an interest rate of around two percent per annum, throughout the investment. The total interest repaid, over 25 years will be $271, 563. The monthly repayment is now $4,239 per month.
Now, assume you speed up things by refinancing, making it a 20-year loan. Your monthly repayments shoot up to $5,059 per month. However, your total interest repayments shrink to $214, 120.
-
Less worry, after eliminating your most significant debt.
There is a big psychological advantage in prepaying the home loan early. You’ll be sure that you can retire well, as paying off home loan means you won’t be burdened with debt in your later years.
If you are paying off the home loan in one lump sum, you remove decades of debt repayment. You will find it easier to take opportunities, such as setting up a business or making a radical career shift – when you are not burdened with a home loan.
-
You escape the unavoidable increasing interest rates.
Home loan interest has historically been low since 2008, after the Global Financial Crisis. However, interest rates have been rising steadily. Remember, the historical interest rate for Singapore home loans is close to four percent, and the current low prices are a coincidence.
-
More security for your family
If you are the sole bread earner, paying off your home loan earlier might mean more security for your family. For example, if you are suddenly unable to work for some reason, but your home loan is already paid off, your partner or children won’t be obligated to worry upon the debt.
But this is not a straightforward matter, as it is sometimes more financially prudent to retain cash savings while relying on Mortgage Reducing Term Assurance (MRTA) to pay off the home loan in emergencies. It is advisable to speak to the financial advisor as this varies significantly between family situations.
-
You can access Cash Out Refinancing.
If you have an entirely outright paid-up private home, banks allow you to use Cash Out Refinancing. This is a loan that uses your home as the collateral. Singaporeans can use this method to borrow up to 50 percent of their home value, without having to meet limitations like the Total Debt Servicing Ratio.
Not only this allows you to borrow significant sums, but the interest rate is also super low. It might be just around 1.6 percent per annum, much smaller than the rate at which your CPF savings accumulate (2.5 percent per annum).
The Cash Out Loan may also be sizeable enough to pay off your other loans at once, such as your combined personal loans, credit card loans, and car loan. It would consolidate all these high-interest debts into a single loan, with the super low rate of just 1.6 percent interest.
Pre-paying your home loan makes sense because:
- It is equivalent to investment
- Helps diversify your investible funds
- Frees up a part of your accrued interest if you sell your house
Let’s not forget the main benefit of prepaying your loan; it feels good not to have any debts. It might make limited sense to invest the additional cash, but personal finance isn’t just about the numbers. It’s also about how you feel.
When you are writing a check to the bank for extra payment, it is essential to mark that you want it to be applied to the principal. If you don’t, the bank might use the additional payment to interest, and paying interest in advance does not earn you any more equity in your home. However, do your homework. Prepayment penalties which can be owed to a lender for prepaying a mortgage within a specified time frame are much less common than they were before the Great Recession but do still apply in some cases.
There is no fixed time like the present to begin your quest to pay off that mortgage. Begin by reading your amortization schedule; once you know exactly how much of your monthly payment goes into interest, and a tiny portion going toward paying off the principal. You will realize that every extra dollar you spend reduces the part of your payment that aids your interest expense. That can be a powerful motivator for financially sound individuals.
If you concentrate your efforts on the task at hand, you may be surprised at how quickly you can retire a mortgage. With your mission accomplished, you will find the comforts of home pleasurable when it is you, and not the bank, who owns your house.
No.1 License Money Lender in Singapore
In the event, you buy a new home the home loan haven approves you may need a bridging loan, just looking for Best Credit licensed moneylender. We will give you the best solution for you. In addition, our colleague is willing to serve all Citizen or expat residing in Singapore to solve your financial problem. The first reason we famous in town is because we are giving out a loan with fast approval.
Need money for an emergency? Act now, contact us at +65 6272 5538 or email us your inquiry at enquiry@bestcredit.sg. In case, you prefer free consultation, just drop by office! Our office is located at Blk 372 Bukit Batok Street 31 #01-374 (Level 2) Singapore 650372.
