At a glance...
One of property owners’ most common questions is whether they should pay their mortgage off early. There are several factors to consider before making this decision. Below we’ve outlined a few detailed points to help you with your decision.
Should you pay off your mortgage or invest?
Paying off your mortgage early has several benefits, including saving on interest and paying off your loan quicker. This is similar to investing, as your savings can be distributed into diverse investments to increase your income. If you decide to sell your house, it frees up some of your accrued interest. Let’s say you have extra money and decide whether to prepay your loan or invest for a yield.
Let’s say you have a mortgage of $500,000, with an interest of 2.5% and a tenure of 20 years. You have $50,000 of spare funds but are trying to decide between paying down your mortgage or investing for a 3.5% annual return over 20 years.
If you decide to pay off your mortgage, you will save $63,600 over 20 years. You will earn $85,000, including the principal, over 20 years if you choose to invest. The answer is apparent. If you have an investment opportunity that provides higher interest than your mortgage, go for the investment option.
Is paying off your mortgage worth it?
Paying off your mortgage has a lot of benefits, including eliminating interest payments which will lower your monthly expenses and allow you to save more each year.
Let’s say you have a home loan of $500,000 for 20 years. That is a monthly mortgage of $2,649. If you made a one-time prepayment of $30,000, your monthly mortgage would decrease to $2,249. This would save you around $160 monthly, accumulating to $38,400 over 20 years. Thus, yes, it is worth it to pay off your mortgage.
REASONS NOT TO PREPAY YOUR MORTGAGE
Reason not to prepay your mortgage?
1. Decreases on Your Emergency Fund
Although prepaying your mortgage has many benefits, it might not be the best move for everyone. If prepaying your mortgage will exhaust your savings, you might want to reconsider. It’s essential to have sufficient protection for significant unexpected expenses.
2. You Have High-Interest Debts
Another scenario where prepaying your mortgage wouldn’t be the best idea is if you have a low-interest rate mortgage along with other high-interest debts such as credit card debt.
3. Prepayment Penalties Outweigh Benefit
Often banks will impose a penalty on prepayment, and if this penalty offsets your interest savings, a prepayment may not be worth it.
4. You Have Great Mortgage Insurance
Some mortgage insurances will pay off your loan in the case of death, terminal illness, or disability. Therefore, if you prepay your loan and deplete your savings, you may not have enough to support your loved one in the case of a costly health issue or death.
Refinancing may be the better option for you?
Refinancing is when you go to another bank to replace your current home loan with a new home loan. Home refinancing is a popular option in Singapore which allows you to receive a shorter loan tenure or reduce your interest rates.
For example, let’s say you have a mortgage of $500,000 with an interest rate of 2.5% with a 20-year tenure, and your monthly mortgage is $2,649. You decide to refinance with another bank that offers a 1.8% interest rate for the same 20 years. Your monthly mortgage decreases to $2,482. This is a monthly savings of around $167 and $40,080 over 20 years. One of the most significant benefits of refinancing is that it costs nothing and saves you thousands.
Our expert opinion is that prepaying your mortgage should be your last option. First, seek investment opportunities with a higher yield or determine if refinancing would save you enough to be worth the process.