Now more than ever, mortgages remain one of Singaporeans' biggest liabilities with rising interest rates. Here are some things to consider as you navigate your home loan.
Interest rates are rising and mortgage rates are expected to continue climbing. In this climate, many homeowners are considering the next best thing to do: paying off their mortgage early.
This makes sense - homeowners naturally want to avoid rising interest rates, pay less interest to save in the long run, and of course, enjoy greater peace of mind.
But is now really a good time to do so? Here are some points to consider when deciding when and how to pay your mortgage:
Check if you might incur any hidden fees or prepayment penalties.
For most housing loans, you will incur a penalty of around 0.75 per cent to 1.50 per cent of the loan amount that is paid early during the lock-in period, depending on your mortgage terms.
Instead, consider repricing or refinancing your loans at lower interest rates after your lock-in period. For example, fixed-rate packages provide stability but are usually more expensive, while floating rate packages are relatively cheaper but prone to fluctuations.
Risk takers can also consider floating packages with shorter lock-in periods, as this gives you the agility to convert to another package afterwards while enjoying savings from the interest rate gap between floating and fixed packages. Currently, SORA-pegged floating packages have a rate of 2.20 per cent, compared to a two-year fixed rate ranging between 2.75 per cent and 2.95 per cent.
Alternatively, you could make partial or full repayments via your CPF account or increase its use for monthly loan repayments. However, note that prepayment made via CPF is still subjected to penalty fees if the repayment is made within the lock-in period.
Paying off your mortgage could impact your finances.
While it may feel liberating to pay off your housing loan early, it also means you will have less money for daily expenses, savings, investments and retirement.
In the worst-case scenario, you might have to dip into your emergency fund to service mortgage payments when unexpected life events - such as retrenchment or major illnesses - occur, something that you should avoid doing as far as possible.
You should also consider other debts you have, especially credit card debt, that may incur an even higher interest rate than housing loans and should take priority in terms of repayment. Credit card debt is one of the fastest growing categories of consumer debt in Singapore, with the Average Annual Percentage Rate (APR) of credit cards hovering at 25 per cent.
Compare the cost of prepayment to investments that could bring you higher returns.
On the bright side, a high interest rate environment means bonds or fixed deposits are looking more attractive from a yield perspective. Two-year to five-year investment-grade Singapore dollar bond yields have risen from 2.5 per cent per annum to more than 3 per cent.
Structured deposits could offer better interest rates and regular payouts. For instance, Maybank’s new five-year structured deposit has seen a good take-up rate due to its potentially higher yields than conventional term deposits.
However, remember that diversifying your portfolio across different asset classes, markets and industry sectors remains key.
No one-size-fits-all solution
Now is the time to reassess your financial abilities and think long-term. Ultimately, your financial situation and preferences should take precedence.