Is It Worth Paying Down My Housing Loan?

Question:

Do you have any information on how to determine whether it is worth to pay my housing loan fully?

DollarsAndSense Answers:

When thinking about whether it makes sense to pay down your housing loan, there are many factors that one should consider. However, it typically comes down to two main factors. Opportunity cost and cashflow.

Opportunity Cost – Assuming you are taking an HDB loan of 2.6%, this means the cost of borrowing money for your housing loan is 2.6%. If you repay this amount, you will immediately save 2.6% per annum. However, you also miss out on the opportunity where you could have invested and earned a higher return than 2.6%. Of course, we have to consider that investing also comes with an element of risk and uncertainty. So, while you may expect a higher return, this is not be a guarantee. There may also be conditions for how long you need to hold your investments in order to earn the return.

Cashflow – If you have an existing housing loan of $100,000, and emergency savings of $100,000, you may choose to repay your housing loan in order to save on interest cost.

However, you have to consider your short-term cashflow. If your emergency savings are depleted because of a housing loan repayment, it also puts you at financial risk if some unexpected cost were to incur, or if you were to lose your job. That’s because you no longer have your emergency savings to tap on since the funds have been used for home loan repayment.

At the end of the day, there is no right or wrong decision. You should decide based on what you are comfortable with, the opportunity cost you lose out on if you repay your housing loan, and your cashflow requirement.