Partial repayment: Why should you consider it instead of fully paying off your home loan

To some people, it makes sense to pay off their home loan early. After all, it feels really nice to be finally debt-free and not be burdened by a home loan. Doing so can save on the interest as well.

And now that interest rates are rising, with the US Fed having just increased the interest rate for the sixth time this year, it may make sense to pay off the home loan early. So that you won’t have to worry over the ever-increasing interest rates.

At the same time, there’s some opportunity cost to fully paying off your home loan. Here’s why you might not want to redeem your home loan fully.

Why you shouldn’t fully redeem your home loan

Even if you have some spare cash (maybe you’ve just struck TOTO) that’s enough to pay off your home loan, it may not be wise to use it to pay off your home loan fully.

1. You can use the money to clear other high-interest debts

Although home loan interest rates are increasing, the home loan is still one of the loans with the cheapest interest rates. In comparison, other loans like credit cards have an interest rate of around 26 per cent per annum, while the interest rate of personal loans is around 6per cent per annum.

So if you have other debts with a higher interest rate than your home loan, it’s better to pay off those debts instead.

2. You can use the money to work harder for you

You can also invest the money into financial instruments that can help you earn higher interest than your home loan interest rate.

In fact, with the current high-interest rate environment, fixed deposits and bonds are becoming more attractive. So if you’re looking for something low-risk, consider these options.

For instance, fixed deposit rates are currently around 3.10 per cent to 3.90 per cent.

Another option is the Singapore Savings Bonds, which for December’s tranche has an all-time high average return of 3.47 per cent over 10 years.

If you’re risk-averse, there’s always the CPF Special Account where you can put your money to grow your retirement fund and earn 4per cent annually.

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3. You need to set aside some emergency funds (if you haven’t done so)

Most importantly, you should set aside some cash for emergency use if you haven’t done so. The rule of thumb is to set aside at least six months of your expenses for your emergency fund. Or even six months of your salary if you want to be safe.

This ensures you have enough funds in case of emergencies or unfortunate situations, such as retrenchment or some medical procedures that’s not fully covered by insurance.

4. There are other ways to lower your interest rate, such as refinancing or repricing

If the main reason for fully repaying your home loan is the increasing interest rates, you can consider refinancing or repricing instead.

Given the current situation, the advice is to choose a home loan with a lower fixed interest rate. Right now, these home loans have a fixed rate for two to three years. With such a home loan, you just have to pay a fixed monthly instalment for the next couple of years, while paying less interest.

Alternatively, consider partial repayment of your home loan.

Consider partial repayment of your home loan instead

This is a good option to consider, especially if you don’t want to be too burdened by your home loan.

Partial repayment helps reduce the monthly instalments and amount of interest paid. Or if you’re taking HDB loan, you have another option of shortening the loan tenure. This means that you’ll still pay the same monthly instalments, but have your loan tenure reduced from say, 25 years to 20 years.

Paying off your home loan partially is also a good way to reduce the amount of interest you’ll have to pay, especially if your loan tenure is left with less than 10 years. Or, if you’re stuck with the ever-increasing interest rate, in the case where you can’t refinance because the remaining loan is less than $100,000.

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What’s the minimum amount required for partial repayment?

For HDB housing loans, here’s the minimum amount for partial repayment:

• Loan commencement date was before April 1, 2012: $500
• Loan commencement date was on or after April 1, 2012: $5,000, with increments in multiples of $1,000

The minimum amount is the same for bank loans from OCBC and UOB, at $5,000 and in multiples of $1,000. Another condition that UOB has is that the loan tenure should be at least five years.

On the other hand, for bank loans from DBS, the minimum amount for partial repayment is $10,000, in multiples of $1,000.

What else to take note?

Whether you decide to repay your home loan fully or partially, if you’re taking a bank loan, take note of the early repayment penalty (there’s no lock-in period for HDB housing loans). You may want to do it after the lock-in period has ended. The lock-in period can last two to five years.

It’s not worth incurring an early repayment penalty if it’s higher than the amount you’re trying to save.

Before paying off your home loan, speak to a mortgage broker to find out which option works best for you.

This article was first published in 99.co.