In Singapore’s high home-ownership landscape, it’s safe to assume that most people are servicing home loans. At the same time, property prices here are quite expensive – and even those who are determined to pay off their homes need a home loan.
With such a heavy financial burden each month, it’s natural that many are also thinking of ways to reduce their home loans, especially when we have some extra funds.
Why You Should Only Think About Paying Down Your Home Loan If You Have A Low Level Of Risk Tolerance
One main reason why we should not rush to pay down our home loan early is that it will deliver relatively poor returns. Don’t get us wrong, there’s always going to be both pros and cons – and we have also written about the advantages we enjoy when clearing our home loans early. But, in this article, we’re focusing on why we should consider other options too.
Think about it – a home loan in Singapore charges 2.6% per annum (for HDB concessionary home loan) or can start at 1.5% to 2% per annum (for bank home loan). On the other hand, investing in Singapore’s SPDR Straits Times Index (STI) ETF will give us a return of over 7.5% since its inception in 2002, while investing into the SPDR S&P 500 ETF will give us an even larger return of about 10.5% since its inception in 1993.
If we can afford to service our home loan but are just unsure about where to park our spare funds, this shows that investing can be a good option.
Read Also: Here’s Why It Doesn’t Make Financial Sense To Repay Your HDB Flat Home Loan Early
What If You Don’t Want To Invest, And Are Extremely Risk Averse?
If we don’t want to take on any risk with an investment, we can still put our funds to better use. Again, the premise here is that we are capable of servicing the monthly home loan (and even perhaps pay off our home loan entirely).
In this situation, we may be better served pouring our funds into our CPF Special Account (SA) and MediSave Account (MA), instead of repaying our home loan.
Our Special Account and MediSave Account pays us a floor rate of 4.0%, while we only save about 1.5% to 2.6% in interest (depending on whether we are using a bank home loan or HDB home loan). This means we can be up to 2.6% better off without taking on any additional risk.
Here’s how the math can look:
4.0% – [1.4% or 2.6%] = [2.6% or 1.4%]
It Gets Even Better – You Also Get Stress-Free Home Loan Repayment Each Month
Even if your primary concern in wanting to pay down your home loan was so you do not have the stress of having to pay down your home loan each month, topping up your Special Account and MediSave Account may also offer an ideal outcome.
It’s best to describe how this works with an imaginary scenario:
- We’re living in an HDB flat worth $600,000 (purchased with our spouse)
- Our remaining home loan is $370,000 (after servicing it for about 5 years)
- We are using a bank home loan (paying about 1.5% interest per annum)
- We are 35 years old in 2025, and will continue working (or even want to take on a less stressful/more meaningful job that pays lower)
- We have the ability to pay off our home loan in full
Top-Up Your CPF Special Account And MediSave Account Up To The Maximum
We can top up our Special Account (SA) up to the Full Retirement Sum (FRS), which is $213,000 in 2025. We’re going to make another assumption here, that someone at 35 will already have about $30,000 in their Special Account. This means the person can make a Retirement Sum Topping-Up (RSTU) Scheme top-up of $183,000 (FRS in 2025 minus the existing $30,000) to their Special Account.
We cannot top up more than the Full Retirement Sum into our Special Account until we turn 55. Then, we can make top-ups till the Enhanced Retirement Sum (ERS) – which is 2x the Full Retirement Sum (FRS).
Read Also: Here’s How Much Your Full Retirement Sum Will Look Like When You’re 55
We can also top up our MediSave Account (MA) up to the Basic Healthcare Sum (BHS). The current Basic Healthcare Sum is $75,500 in 2025. Another assumption here is that a 35-year-old will also have about $30,000 in their MediSave Account. This means the person can make a MediSave top-up of $45,500 (BHS in 2025 minus $30,000) before they hit the Basic Healthcare Sum.
Read Also: CPF MediSave: Here’s How Your Basic Healthcare Sum Will Look Like When You’re 65
Taking both schemes into consideration, we can top-up our Special Account and MediSave Account up to their respective maximum allowed $228,500 (not exactly the full home loan amount, but a big chunk of it) – to hit the Full Retirement Sum (FRS) in our Special Account and Basic Healthcare Sum (BHS) in our MediSave Account.
If our spouse does the same thing, the total top-up into our CPF accounts will be $457,000 – which is more than the remaining home loan we have.
Effectively, CPF Contributions + Interest Rate Returns From MediSave Account Flows Into Our Ordinary Account
If we continue to work thereafter, any amounts that would have gone into our MediSave Account will now flow into our Ordinary Account instead. This means up to 31% of our monthly salary could potentially go to our Ordinary Account: 23% from normal OA contributions + 8% that would have gone into Medisave Account.
Subsequently, this amount can then be fully used to continue servicing our home loan – which gives us much less stress in needing to service our home loan. If we wish, we can even choose to ramp up our monthly mortgage repayments.
Going back to the example, with a remaining home loan of $370,000, we have to pay approximately $2,083 a month or $25,000 a year to service our home loan (using the 2.6% interest rate and a 25-year repayment tenure). This means, as long as we and our spouse earn at least $3,500 each per month ($6000 in total), we may be able to service the home loan entirely out of our Ordinary Account contributions from work.
This is a possible scenario as a salary of $3,500 is below the median salary in 2024, which the Ministry of Manpower (MOM) reports to be $5,500.
Additionally, as we have already fulfilled Basic Healthcare Sum in 2025, any spillover interest earned beyond the Basic Healthcare Sum in 2026 will flow into our Ordinary Account, adding to the CPF OA balances available for servicing our home loan.
While our imaginary scenario may be unrealistic for many Singaporeans who cannot pay off our home loans entirely, this scenario shows that we can still benefit from topping up our CPF accounts every month to potentially earn a higher interest return.
