Can You Pay Off a Mortgage Early in Singapore?
The short answer is yes, you can pay off your mortgage early. This is called prepaying a mortgage. However, there can be consequences to doing so.
Read the Fine Print
Before paying off any loan early, it is important to read the fine print. Based on the terms of your loan, you could be subject to a prepayment penalty.
Pros and Cons
It’s important to weigh the benefits, as well as the cons of paying off your mortgage early. This will help you decide whether paying off the mortgage early will save you more than what you would earn if you put those funds to work elsewhere.
Pros of Paying Off Your Mortgage Early
- Interest Savings:
- By paying off your mortgage early, you can save a significant amount on interest payments over the life of the loan.
- Extra payments reduce the principal faster, leading to lower interest charges.
- Peace of Mind:
- Eliminating your monthly mortgage payment can provide substantial mental relief, especially as you approach retirement and anticipate living on a fixed income.
- It can also reduce financial stress and increase your sense of financial security.
- Increased Home Equity:
- Paying off your mortgage builds home equity, which can be borrowed against through a mortgage withdrawal equity loan (MWL) for emergencies, home improvements, or other financial needs.
Cons of Paying Off Your Mortgage Early
- Opportunity Cost:
- Investing the money you would use to pay off your mortgage could potentially yield higher returns. Historically, stock market investments, S&P 500 or even certain local investment options such as REITs, might offer better returns than the interest savings on your mortgage.
- You need to consider the potential gains from investments versus the guaranteed savings on mortgage interest.
- Liquidity Concerns:
- Your home is a non-liquid asset; it can take time to sell and access the equity.
- Paying off your mortgage early could deplete your liquid assets, reducing your flexibility to cover emergencies or take advantage of investment opportunities.
- Prepayment Penalties:
- Some mortgages come with prepayment penalties, which can offset the benefits of paying off your loan early.
- It’s crucial to read the fine print of your loan agreement to understand any potential penalties.
Things to Consider
Other Investments
Will other investments be a better choice than paying off a mortgage early? This is a personal decision, but investing could be more sensible for some people.
According to a Chartered Financial Analyst, “Sadly, the math tells us it’s almost always better to invest in other places than in your mortgage.”
Mortgage Rates
Mortgage rates have risen significantly in recent years but are still somewhat lower than the average long-term return of the stock market. On average, the S&P 500 has returned 10 percent over the last 90 years. That means that it’s theoretically a better call to invest than to pay off mortgage debt.
Capital Appreciation
While you might see a 10 percent appreciation over the long term, you could see a year, five years, or even more with much lower returns. The S&P average ignores volatility in returns.
No Guarantees
There are no guarantees on investments. After paying off your mortgage early, real estate prices could plunge, leaving you with a potential loss.
Liquidity
Your home is considered a non-liquid asset because it can take months or longer to sell the property and access the capital.
The Risk of Depleting Your Liquidity
“If you start paying down your mortgage too fast, you risk depleting your liquidity,” says Jasper Eng, Head of Mortgage, director at IQrate SG. “The kind of liquidity you have is important, too.”
An Emergency Fund
One approach to this is to have an emergency fund, as well as assets like mutual funds, stocks, treasuries, bonds, and marketable securities available in an investment account. You should also have money in other investments that are easy to convert to cash when needed.
Other Uses of the Money
How will you use your money if you don’t pay off your mortgage early? Be realistic about what you’ll likely do with your money if you don’t use it to retire your mortgage debt. After the mortgage is paid off, will you actually use it to get ahead?
A Better Choice After All
If you struggle with keeping money in the bank, it might be a better choice for you to pay off the mortgage early. Your home can be a forced-savings tool, and making extra mortgage payments can save you thousands in interest over time.
If you’re going to blow the extra money on silly purchases, then perhaps spending it on the mortgage is the best choice.
Peace of Mind
How much do you value peace of mind?
For many, eliminating the monthly mortgage payment ahead of retirement can provide mental relief when considering living on a fixed income.
Bottom Line
Is early mortgage payoff right for you?
Ultimately, it comes down to personal preference and whether the benefits outweigh the costs. Always consider any prepayment penalty and the potential tax consequences. Also, determine if it’s more sensible to use the funds elsewhere, like to eliminate high-interest debt.
Bonus Tip
While you’re weighing your options, consider taking a moment to check current mortgage rates and see if refinancing could help you save money, especially if you plan to stay in your home for a long time.
By considering these factors, you can make an informed decision about whether paying off your mortgage early is the best financial move for you in Singapore.
