Important findings

  • Assuming an initial home loan of $ 200,000, investing in an STI ETF like the Nikko AM can produce nearly ten times the return on an HDB loan total.
  • The early repayment of the mortgage – and then cash flow problems – can result in repayments worth more than $ 20,000 when you take out a personal loan.
  • If you pay off your mortgage early, you save on interest payments (more than 50 percent if you pay off a $ 300,000 loan in five years, compared to 10 years).

Singapore’s housing market is one of the most expensive in the world. For example, the average cost of an HDB home listing is $ 532,768, or $ 507 per square foot.

Compare that to the average monthly salary of $ 5,783, and it’s not hard to see that many Singapore homeowners have to go into debt (i.e. take out a home loan) to buy a property.

For those lucky enough to have extra cash after a few years of home ownership, paying off the outstanding mortgage may not necessarily be the smartest choice – especially given the option of refinancing or investing.

Can investments lead to better returns?

One of the main reasons homeowners want to pay off their mortgage early is to reduce interest payments.

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The current discounted rate for an HDB loan is 2.6 percent per year and between 1.95 percent and 2.8 percent per year for home loans.

However, it’s worth noting that you can get better returns on your own investment.

For example, you might consider investing in STI ETFs. These are the blue chip stocks that are available in Singapore’s economy (e.g. DBS Group Holdings and Singapore Telecommunications Limited).

The annualized return of the SPDR STI ETF has been six percent since its inception in 2002, while the Nikko AM STI ETF has reported 6.49 percent since its inception in 2009.

Returns on investing in Nikko AM STI ETF versus total loan interest

Remaining credit for 20 years / $ Total Interest Paid (HDB, 2.6 percent) / $ Total Interest Paid (bank, 1.29 percent) / $ Nikko AM STI ETF Net Investment Return (6.49 percent annualized rates) / $
200,000 56,698.26 27,015.06 503,406.76
300,000 85,047.40 40,522.59 755,110.14
400,000 113,396.53 54,030.12 1,006,813.52

If you have a low appetite, don’t worry. There are many low risk investment options. A good example is the Singapore Government Bonds (SGB), where coupon rates (i.e., yields) can be up to 3.375 percent per year depending on the due date.

Investments provide you with liquidity that can support your finances if necessary

Another reason to invest the additional cash available is that various investments offer you the advantage of being closed if necessary (e.g. if you unexpectedly lose your job).

You could sell your stocks or bonds, such as the Singapore government bonds mentioned above, to get back the “face value” and the interest accrued on it.

Ultimately, one should not forget that there is no point in paying off the home loan early – and then being forced into high-interest personal loans because of cash flow problems.

Returns on investing in Nikko AM STI ETF versus total loan interest

Remaining credit for 20 years / $ Total Interest Paid (HDB, 2.6 percent) / $ Total Interest Paid (Personal Loan, 3.48 percent) / $ Difference / $
200,000 56,698.26 77,887.61 21,189.35
300,000 85,047.40 116,831.42 31.784.02
400,000 113,396.53 155,775.23 42,378.70

Should the mortgage be paid off early?

However, there can in fact be several unique benefits to paying off your mortgage. You don’t have to deal with the psychological stress of skimming a monthly amount from your take-home salary. Should the economy recover, interest rates could rise in the future.

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After all, the historic interest rate on Singapore loans is just under four percent.

Another reason you might want to pay off your mortgage early is that it could translate into higher cash income when you eventually sell your home.

This is due to the CPF accrued interest rule if you use CPF to pay for your home and sell your home before you turn 55: you will have to “refund” your OA with what you would have earned, if You would have left that money behind CPF.

If, on the other hand, you are refinancing your current home purchase loan (as long as the blocking period has expired), you can opt for a mortgage package with a lower interest rate.

How the loan repayment time affects the interest rate

Years Total Interest Paid (HDB, 2.6 percent) on the initial loan amount of USD / S $ 300,000 Total interest on the initial loan amount of S $ 300,000 (bank, 1.29 percent) / $
five 20.246.81 9,940.00
10 41,011.16 19.926.91
fifteen 62,613.70 30,121.19
20th 85,047.40 40,522.59

Take your individual financial situation into account when making a decision

Ultimately, the decision as to whether to pay off your mortgage early, refinance or invest the amount of money is yours; You need to assess your living conditions in order to decide which financial decision is the right one (e.g. always pay off other higher-interest debt first, if you have any).

If you haven’t already done so, consider using a home loan refinance calculator to find the best interest rates and to calculate whether a refinance can help you save money in the long run.

This article was first published in ValueChampion.