For many Singaporeans, the housing loan is the single largest financial commitment in their lifetime. The idea of being debt-free and owning your home outright is attractive, but the decision to pay off your mortgage early is not always straightforward. Sure, repaying your housing loan fully will give you peace of mind and guaranteed savings, but you will need to consider the opportunity costs of liquidity and the loss of potential investment returns.
Why You Should Pay Off Your Home Loan Early
One of the most compelling reasons to clear your housing loan is the guaranteed savings on interest. With mortgage rates in Singapore typically averaging 2% to 3% over the entire loan period, repaying early means you avoid thousands of dollars in future interest payments.
Say you still have $100,000 outstanding on your home loan with a 2.6% interest rate, and about 10 more years to go before it’s fully paid off. If you keep paying about $947 every month, after 10 years, you would have paid a total of $113,670.39. That’s $13,6570.39 in interest you would have saved if you had just paid off the outstanding amount of $100,000 early. That amount of savings is undeniable.
There’s also a level of psychological comfort knowing that you no longer have the burden of monthly repayments. For those who have been servicing their loans in cash, the feeling of freedom now that you have that extra liquidity cannot be underestimated.
Eliminating your mortgage frees up monthly cash that can be redirected towards other priorities. Whether you channel them to retirement savings, children’s education, or lifestyle upgrades, this improved cash flow will make day-to-day financial management easier.
And for those who have been paying out of their CPF savings, the extra interest you’re now earning is substantial. Just think of it this way, using your CPF savings to pay off your home loan accrues interest that you have to “pay back” to your CPF account upon selling the property. However, if you pay off the outstanding loan amount in cash, your CPF savings can start generating interest, giving you more for retirement. This sense of security often outweighs other financial considerations.
In addition, early repayment shields you from the uncertainty of rising interest rates, especially what we’ve seen over the past decade, with home loan rates rising as high as 4% just three years ago.
Why You Should Not Pay Off Your Loan Early
While paying off your loan saves interest, it may not be the most efficient use of funds. Remember that home loan rates in Singapore typically averaging 2% to 3% over the entire loan period. That means if you can earn 5% to 7% annually from a diversified investment portfolio that includes equities, REITs, or CPF Special Account top-ups, keeping the loan and investing the excess capital would earn you twice as much as paying off the loan early.
Property is also an illiquid asset. Paying off your loan early means your funds are now tied up in your home and cannot be easily accessed for emergencies or investment opportunities. Maintaining liquidity is crucial, especially if you do not have substantial cash reserves. If you own private property, you can take out a home equity loan, also known as cash-out refinancing, if you need funds urgently. However, if you have an HDB flat, you don’t have such an option, even if it’s fully paid up.
Another factor is CPF usage. Many Singaporeans rely on their CPF Ordinary Account to service housing loans. By paying off the loan early, you may deplete CPF balances that could otherwise earn a safe 2.5% to 4% interest, depending on whether it’s in the Ordinary Account, Special Account or Retirement Account. In most cases, leaving funds in CPF can be more advantageous than using them to clear debt.
There are also practical considerations, such as prepayment penalties. HDB loans don’t have early repayment penalties, but most bank loans impose a fee of about 1.5% on the outstanding amount for early repayment within lock-in periods.
Read Also: HDB Or Bank Loan: Pros & Cons To Consider Before Deciding On Which Housing Loan To Take
These penalties can erode the financial benefit of paying off your loan, so it is important to check your loan terms before making a decision. Finally, debt itself can serve as a hedge against inflation. If your loan interest rate is lower than inflation, keeping the loan may actually be financially advantageous, as you are effectively repaying with “cheaper” future dollars.
Instead Of Repaying Your Home Loan In Full, Consider Refinancing Or Repricing
For homeowners who want to reduce costs, consider refinancing or repricing instead. Refinancing involves switching to a new lender offering lower interest rates or better terms, while repricing means negotiating with your existing bank to adjust your loan package.
Both options can significantly lower your monthly repayments and total interest costs without requiring a lump-sum payoff. For example, moving from a 2.6% loan package to a 1.45% package could save thousands of dollars annually. You’re still reducing the financial burden of your mortgage, but you’re now doing so without losing any liquidity.
Refinancing and repricing come with their own considerations, of course. Banks may impose administrative fees, and some packages have lock-in periods that restrict when you can make changes.
Let’s assume you have a $200,000 outstanding loan currently at 2.6% interest, with 10 years remaining on your loan term. Paying it off in full would save $27,340.77 in future interest, but you’d be $200,000 out of pocket. Refinancing or repricing your loan to a package that averages 2% per annum over the remaining 10 years would only cost you $20,832.29 in future interest. That’s $6,508.48 in interest saved, and you’d still have $200,000 to invest in a diversified portfolio.
Assuming an annual yield of 5%, that’s at least $20,000 per year. Over a decade, the difference compounds significantly. Alternatively, placing that $200,000 into your CPF Special Account could earn 4% risk-free, boosting your retirement savings.
So Should You Pay Off Your Home Loan In Full Or Not
For Singaporean homeowners, paying off your housing loan fully is the safest path to reduced risk and guaranteed savings. It is particularly suitable for those nearing retirement or those who value peace of mind above all else. On the other hand, financially stable individuals with strong investment strategies may benefit more from keeping the loan and investing excess funds for higher returns.
Refinancing or repricing offers a middle ground, allowing you to lower your interest burden while maintaining liquidity and flexibility. Ultimately, the decision is highly personal, but you don’t have to make it alone.
Mortgage brokers in Singapore offer their time and advice to help you make the decision that is right for your individual needs. Since they are often paid the same commission rates by the banks they refer you to, they offer their services to you for free. Consider our friends over at RedBrick and Cashew.
If you prefer a DIY approach, Cashew offers a user-friendly platform to compare packages across banks based on your loan inputs. Additionally, Cashew’s advisors also assist you in applying for the preferred loan package, all from the comfort of your home.
Alternatively, RedBrick offers a more personalised experience, with its professional mortgage brokers sharing insights into the nuances of each loan package during a free, non-obligatory consultation. Check out our home loan guide for more information.
Read Also: Floating Vs Fixed Loans: Pros and Cons Of Either Option
