What are the best times to consider a shorter tenure on your home loan in order to purchase The Reserve Residences
Long home loan terms are likely to make you cringe if you’re financially conservative Singaporean and don’t like taking on debt. You feel like you are losing out by borrowing.
Home buyers are advised to get the longest possible home loan term. It’s and not because banks will want to take you down and make you homeless. A home loan with a long term can benefit buyers. We have written about this and there are very few situations where a shorter tenure is financially prudent.
Let’s first understand why the conventional advice is to extend your home loan.
Before we look at the reasons for a shorter loan term, let’s first consider the conventional advice against it.
Your monthly payments will rise if you lower your maximum loan term. Consider a HDB Housing Loan of S$360,000 for a maximum term of 25 years. An HDB loan has an interest rate of 2.6% per year. The monthly loan repayment would be S$1,600.
This same loan term can be shortened by only 20 years and the monthly cost is S$1,925. It’s S$2,400+/month if you reduce it to 15 years.
Remember that your home loan balance is more important than your cash flow in your day to day life. The higher monthly payment means that you are at greater risk of defaulting on your loan service.
If S$1,925 is due next week , and you don’t have it , what does that matter? Do you have 15 years left or 10 years? Most people are more concerned about the ability to pay their mortgage off than the interest payments. Refinancing is not always an option.
You must also consider your end-game. Imagine that you have to pay your flat by 55 and are retrenched, or you have an emergency. There are no savings or any other assets, but a flat that is paid up. What next? Is it okay to sell in order to unlock cash value?
Even if the interest rate is higher, there are compelling reasons to choose a longer loan term. The bank’s interest rate becomes cheaper as inflation decreases the money’s value over time. It is better to have a longer term while using your cash flow to invest into products that keep pace with inflation.
After you have understood all of the above, consider these reasons to get a shorter loan term:
- Even with a shorter term, you can easily meet the TDSSR/ MSR requirements.
- Even if you pay more each month, you can still save substantial amounts
- You are not an owner-occupier and you’re only looking for long-term gains
- You meet the criteria and have big plans for your future property investments
Reason #1: Even with a shorter term, you can easily meet the TDSR / MSR
Bank loans: Your monthly loan repayments and any outstanding debts cannot exceed 55% your monthly income. Your monthly loan repayments for loans on EC or HDB purchases cannot exceed 30% of your monthly earnings.
You should verify your eligibility as a shorter loan term means you will have to pay more monthly. These requirements are not met so you will need to increase your downpayment or buy a smaller home. You might then be able to pay the shorter loan term.
Reason #2: You can save substantial amounts while still paying more each month
A home owner should have an emergency fund that can pay at least six months’ worth of mortgage payments. This will give you the time to find another income source, find tenants, and sell your house without taking a huge loss.
You can have an emergency fund in either your CPF Ordinary account (you can save up to S$20,000 when you buy a house) or in an accessiblesavings. You can’t withdraw your emergency fund if it is locked up in a bond of endowment.
Before you take out a short term loan, make sure to consult a qualified finance professional if you don’t have the savings. You’re likely to get stares like you’re insane from them, but keep asking.
Reason #3: Because you aren’t an owner-occupier and you are looking for long-term gains,
Owner-occupiers have less incentive to rent for a shorter period of time than investors. This could be due to higher rental yields or gains for investors who plan to sell after 20 years.
Investors may be paying attention to mortgage interest rates. They have been at historical lows for approximately 10 years. They can save money in the long-term by repaying the loan early to avoid rising interest rates. The historical interest rate on home loans in Singapore was close to 4%.
However, interest rates have been at half the amount since 2008 and Covid-19 has brought rates down to records low. Property prices would rise if they were returned to their historical rates.
If the property isn’t your actual home, but an investment property that you want to rent out, it’s easier to quickly sell it if you have an urgent need for cash. It is more difficult to sell a property that is owned by an owner-occupier. They can then move on.
Reason #4: You meet the above requirements and have big plans for your future property investments
You can simplify your cash flow if you are a successful serial property investor and have a lot of cash.
For example, a 15-year loan term automatically clears your loan obligations by 15 years, so you can obtain maximum 75% loan for next residential property (assuming that the loan-to value ratio rules remain the same).
In most cases, early redemption will still be the best option. However, if you have more than five property investments (whether they are residential or commercial), having long loan terms might limit the amount of leverage you can get for property investments later on. Refinancing will be difficult if you have too many mortgages.
Before you commit to a plan/home loan, it is advisable that you consult a financial advisor or mortgage broker.