Recently, we made a decision to make an early prepayment to our home mortgage. It was a very hard decision to make as this payment is irreversible and it also means that we have lesser disposable cash (and CPF) on hand.

Ultimately, it is a very difficult choice to make, but these are some of the arguments one can make on both sides on whether you should pay off your home mortgage early.

First of all, there are 2 types of early prepayment – partial prepayment and full repayment of loan. Partial prepayment means you make a lump sum payment to your loan to reduce the loan amount, but not fully. Full repayment means that you make a full payment to your loan such that you do not have any outstanding loan anymore.

No, keep the home mortgage

Undoubtedly, home mortgage would be one of the lowest interest loans and highest loan amount that we will ever get in our life. Credit card interest rates can start from 24% and personal loan interest rates can start from 5%. In fact, there are also many people who maximize their home loan amount (even though they do not need it), for other purposes.

These are some of the reasons that one may argue to keep the home mortgage even though you have the extra money on hand.

Invest the money

The most common reason homeowners are encouraged to not pay off their home mortgage is to use the money to invest in them at a higher return. You can review your past investment performance. If your investment returns are higher than your home mortgage interest, it would make sense to use the money for investment instead.

Liquidity

Sometimes, it is a privilege to have some spare cash easily accessible in the face of any emergency such as healthcare crisis or retrenchment. One cannot be too complacent in planning for the unknown, and keeping some money that you can quickly spend can be a god-bless in tough situations. On the other hand, houses are considered an illiquid asset and it is generally harder to generate quick cash flow that does not involve selling or renting, or taking an additional loan, which all would take considerably time.

Yes, pay off the home mortgage

At the other camp, there are also many people who prefer to pay off or repay a good chunk of their home mortgage as soon as possible. Unless you are taking a HDB loan, bank loan interest generally fluctuates and a 1% increment in the interest rate would be a killer to many.

These are some of the reasons that one may argue to quickly pay off the home mortgage.

Interest rate higher than other “safe” investment

It is a pretty straightforward calculation. Can you use the money you intend to pay off the home mortgage for other “safe” investments? If your home mortgage interest is very high, it would make more sense to prepay them off as you are “losing” money if you invest the money in other financial instruments.

Some of the “safe” investments out there are CPF OA (2.5%), Fixed Deposits (FD), T-Bills and Singapore Savings Bonds (SSB). You can compare your current mortgage interest rate and see if you can get a better rate in other investments. If so, you can use the money to invest in them instead.

Peace of mind

Sometimes, in the pursuit of making financial sound decisions, people fail to consider the psychological impact of a good sleep from being debt-free or carrying less debt. Having a burden of a never-ending debt for the next 10 to 20 years could sound pretty daunting, and it could wear you down eventually. This would be made worse if you are in your 40s or 50s with a higher possibility of being retrenched or falling sick.

CPF rich

Some of you people have been diligently saving up your CPF ordinary account (OA), and is now CPF-rich. However, CPF OA account have very limited purposes such as paying for house and education for your children. If you do not have any other purposes for the money in the account (such as investing in it), it could be time for you to pay off the loan with the CPF funds and move on to other financial planning.

There is also a debate between what a good debt is versus a bad debt. Many consider home mortgage as a good debt and it is unwise to pay off them so quickly. However, the economy may change quickly (hello Covid period!), and employment situation, health conditions, family setting can change in a jiffy.

In other words, do what makes you feel comfortable. Everyone have different thoughts and expectations in life. Decide if you want to pay off your home mortgage based on what works for you.

Last Updated: 30 Jun 2024