“I Paid Down My Home Loan Early” 4 Homeowners Share How They Are Working Around Rising Interest Rates
With interest rates now sitting at over four per cent, and the potential for further hikes on the horizon, Singaporeans homeowners are beginning to feel the heat. From reaching CPF withdrawal limits, to questioning home affordability, Singaporeans are still feeling their way around a new environment. In fact, according to an OCBC survey, 40 per cent of homeowners face difficulties with repaying loans, which is up from 31 per cent last year. We’ve never seen interest rates this high in over a decade, and now is the best time to share survival methods:
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1. Hopping between semi-fixed rates
One problem with Singapore home loans is that there is no fixed-rate* home loan. At the most, you can get a fixed rate period of about three to five years; but after that, it’s back to the floating rate again.
Jeremy, who has been a homeowner since the early 2000s, explains how he copes with this:
“I don’t like to have a lot of volatility in the interest rate, but unfortunately, I can’t qualify for an HDB loan either. So I maintain a semi-fixed rate. Whenever the fixed rate period runs out, I will refinance into a new fixed-rate loan for another few years. So I go through my entire loan tenure going from one fixed rate to another, and always keeping my expenses controlled.”
Mortgage brokers said this can help financial planning, but they also warned that it may not save you money. Fixed-rate loan packages are priced higher (currently around four per cent), so there is a risk that you’re paying more if rates don’t rise higher as expected.
Another broker pointed out that conveyancing fees could add to expenses. You may pay as much as $2,500 to $3,000 in legal fees, to refinance to another home package – so it could be pricey to repeatedly jump between fixed-rate loans.
*HDB loan rates have stayed at 2.6 per cent for over 20 years, but bear in mind it’s pegged at 0.1 per cent above CPF rates. CPF rates are revised quarterly, so there’s no guarantee that even HDB rates are fixed forever.
2. Switching to partial cash repayments
M and her husband had to use a bank loan for their resale flat, as they were told their income is too high for the HDB loan. Unfortunately, their loan repayments began in July this year, just as rates were starting to climb.
“We have a plan to upgrade in around five to seven years,” M says, “so for us the concern is the CPF refund. When the rates are higher we’ll use more of our CPF; so to balance it out we partially service the loan in cash. We also didn’t use our CPF for smaller things like lawyer fees, just to ensure we won’t end up refunding too much.”
M’s husband added that the initial plan was to use CPF only for the down payment, and service the home loan in cash. But the amount of monthly repayments, coupled with the rising interest rate, would have caused too many cashflow issues.
3. Pay down a portion of the loan early
J received a lump sum in February this year, when his endowment plan matured. While his initial plan was to re-invest it, the volatile economy made him change his mind:
“I wasn’t sure what’s a good place to put my money right now, with the Russia-Ukraine war and inflation and everything, and I am a typical kiasee, risk averse type. Then I heard about the interest rate going up, and I’m convinced we’ll see four per cent next year, or shortly after.
I checked that there was no penalty for me to redeem my loan early. So I put in a lump sum to pay down my loan, while keeping some for my savings. Now I am paying almost $700 less per month, even though the rate just went up, and I’m quite happy with that.”
That said, please note that we don’t endorse this course of action for everyone. Prepaying your home loan locks up cash in your property, and can land you in a highly illiquid position. Consult a financial professional before putting down large amounts to accelerate mortgage repayment.
4. On the other side of the same coin, you can shorten the loan tenure
J is quite fortunate in that he had a lump sum he could use. For homeowners who don’t have the fortune of that option, one other alternative is to pick a shorter loan tenure. In most cases, a shorter loan tenure (e.g., 15-year loan tenure instead of 25 years) will have a lower interest rate.
This method is only viable for those who have sufficient income though: shortening your loan tenure will raise the monthly repayments, so you need to ensure you still qualify under restrictions like the TDSR. You also need to be comfortable paying more each month; be careful to avoid cashflow disruptions.
As with making prepayments (see point 3), we recommend you consult with a financial advisor before taking this step. For some individuals, a longer loan tenure might be the less risky option, regardless of the higher rate.
Remember that as a rough rule, the home loan repayment should not exceed your monthly income by more than 30 per cent, even if the TDSR might allow otherwise. Shortening the loan tenure may take monthly repayments above this level.
5. POSB has a special home loan package for those earning $2,500 a month or under
No, this isn’t a sponsored post – we just feel it’s really appropriate to mention it here. If your income is $2,500 per month or below, and for some reason, you need to use a bank loan (e.g., you took a bank loan earlier and can now only refinance into a bank loan*), POSB has an HDB home loan package.
This loan package has the same interest rate as the HDB loan (2.6 per cent), subject to some terms and conditions (minimum loan amount at $100,000). On the off chance you’re affected and qualify, it may be worth a look.
We would still suggest you get a second opinion from an independent mortgage broker, before or after going to the bank.
*You can refinance your HDB loan into a bank loan, but not vice versa.
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1 Comments
Question w.r.t.point 2 about not maxing out use of CPF OA funds: Wouldn’t it make more economic sense to max out the use of CPF OA (earning / costing 2.5% p.a) in the repayment of mortgage loan and all applicable fees in a rising interest rate environment (currently at 3-4% p.a)? That’s assuming that the funds freed up (by the use of CPF OA funds) can be deployed to earn >2.5% p.a, which is highly possible in today’s environment.