Property Mortgage Loans are getting a lot of attention now as the interest rates are increasing. On 15 Nov 2022, DBS, OCBC and UOB raised their fixed home loan interest rates, with rates reaching up to 4.5 per cent. If you are approaching your refinancing period, there is a high chance that you are thinking of paying off your property mortgage loans. Should you do it or not?
Side note, if you are unaware of the latest property cooling measures, click here to read about it.
Mortgage is a loan that is secured by real property. It is a financial tool that makes the ownership of property possible as not everyone have the luxury of having hundreds of dollars in the bank at once.
The mortgage is made up of Borrower (you), Lender (usually the banks), Loan Amount, Interest Rates, Loan Tenure and Monthly Installment. Using a formula, you will be able to find out your monthly installment for your mortgage.
Behind every financial model, there is a few key assumptions that we will have follow. I have build an adjustable model to take into account your property mortgage loan value and also the interest rates. Here are the assumptions.
- Loan Value: $1,000,000
- Interest Rates: 4% and 1.1% (for comparison)
- Interest Rates are Annualized
- Amount to Pay Off: $100,000
- Loan Tenure: 25
- If not paying down loans, will be investing $100,000
- If paid down loans, will be investing the interest that is saved by paying down loans
The 2 scenarios are whether this person should pay off their loans or not.
In the first case study at interest rate 4%, you can see that it only make sense to pay down your loan if you are unable to find an instrument to invest at >4% (with the actual number closer to 5%). Usually, this means that you might be a balanced or adventurous investing personality.
The are interests in T-Bills and Singapore Saving Bonds (SSB) as these instruments are now offering cut off yield of 4.2% (T Bills on 5th Jan 2023) and 3.47% (SSB on 1st Dec 2022). Very simply, if you invested into T-Bills and SSB at this rate with an existing property loan of 4.5%, you would be worst off.
If we were to rewind the clock and see property mortgage loans to be at 1.1%, it make senses to pay down your loan if you are unable to find an instrument to invest at 2%. Although this number might seem low, it also worth noting that at that period, interest rates for T-Bills and SSB were significantly lower too. The average interest for SSB on 2nd Jan 2022 was 1.76%.
In this scenario, those that were invested in the equity markets would definitely not pay off their loan.
To put these 2 scenarios together, there is a strong case not to pay off the loans in a lower interest environment.
That being said, I would advise you to consider that there are many more factors that you should take into consideration.
- If you are thinking of paying off the loan, will this reduce your saving significantly? While it is good to reduce the amount of interest you are paying, it is unwise to do it when it affects your liquidity ratio. A period of retrenchment or illness will let you wish you didn’t pay down the loan.
- Are you planning to invest into another property? As you pay off the loan, you will be able to get another loan to acquire another property.
- Are you someone who considers being debt-free important? Is accrued interest daunting if you are using your CPF-OA?
The above is simply a financial model. You are unique in your own situation. If you would want clarity in your situation (depending on your interest rate, loan tenure etc), feel free to reach out to me so that you can understand your situation using the financial model above.
Mortgage planning is an important element in financial planning. I wish you all the best and happy chinese new year!
Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.
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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.