Pros and Cons of Prepaying Mortgage
There are very few of us that possess enough property to pay at once if we wish to own a home. And buying homes in the Singaporean market is a tough nut if you don’t have a minimum monthly salary of SGD10,500 (for the core central Singapore). And with an interest rate of 3.5% per annum for 30 years, you better have a plan to get rid of the bank on your trail and own the property for yourself. No one wants to keep paying for their dwelling all their lives or lose it in times of sudden peril. So the easiest way we look forward to is to save enough to pay off the mortgage as early as possible.
Prepayment of loans is a good idea but certain possibilities might also want you to pull your cashback. In a general, a short period where you can pay advance mortgages can help you get off the loan sooner and an abode of your own, while you grow older, is something everyone needs.
So prepaying mortgages has benefits in the long term but going overhead with paying the bank in advance can also affect your loan policies. Let’s check the benefits first.
Sooner the Payment Lesser the Interest
The bank has a different interest rate on all kinds of loans. The amount paid by the bank to the seller has to be paid for by you in extra. The interest rates add an extra load to your finances. So if you can save some significant amount on the interest on your loans, it helps you to save more for prepaying later. Suppose you pass SGD 1 million home loan on a 25-year tenure. Presume an interest of 2% per annum on the loan amount for 25 years. Calculating that we get SGD 271,563 in 25 years of repayment. That means you pay SGD 4,239.
Now you can speed things up by refinancing your loan and turning it into a 20-year loan. Now you pay SGD 5,059 monthly, so the yearly repayment of interests comes down to SGD 214,120. Getting rid of 5 years of interest tenure SGD 57,443. That saves you almost SGD 11,500 yearly and this amount can using for an investment plan that will finance you over the years while you repay your loans.
Removal of Stress from Debt
Prepayment of mortgages has a positive psychological difference in your financial mindset. When you keep prepaying your mortgage debt every year, you release from the negative presumptions about retirement. So when you retire you won’t have to worry about the debts. Paying off debts earlier makes you financially free in the later years of your career and the money that you earn gives you the potency of saving. That gives you opportunities so you can make another way of earning money, like setting up a business.
There are benefits to prepayment of debt but then removing money from one aspect and putting it into another makes differences that might not be financially healthy. Here are the cons of the prepayment of mortgages.
Leaves You Without Savings
Mortgage payments are necessary debt. But while trying to prepay this debt in advance, you must not rush away and think that your savings are expendable to pay off big debts. As general financial welfare thought you must put away at least 6 months of general expenses as savings. Making your savings obsolete for the sake of homeownership can reap disastrous results in times of financial perils and then you will have to look for ways for credit which will add to your debts. Medical issues, lawsuits, and financial crisis like retrenchment can lead to bad results if your savings have already been used to pay a mortgage. At times of such cash flow issues, you move towards personal loans again and put yourself under higher rates of interest while your mortgage still continues.
Prepayment Can Have Penalties
Paying off a bank loan earlier may seem easy but beware of the bank rules that impose penalties on the prepayment of loans. If a bank loan feels heavy, you can always opt for refinancing and changing the tenure of your loan to a shorter one so you can get away from the penalties that banks impose on the prepayment. Most banks require you to pay an extra minimum of 1.5% of the total amount being paid to counterbalance the interest lost on the loan tenure. Though you must enquire at your bank about the penalty charges as some banks don’t have penalties if the prepayment is paying under a certain amount.
Payment of Other Debts Gets Affected
It is highly unlikely that one might have just a mortgage payment due every month. You probably have other loans and debts that need to be looked after before you pay the mortgage. Credit card bills, personal loans, and vehicle loans are some of the loans that are more expensive to your wallet if take on a long term basis like the home loan. Personal loans are known to be calculating interest at about 6 to 9% per annum while credit card loans may compound up to 26% per annum if the bills keep adding up. So the mortgage is the cheapest loan interest that you pay. All the other loan repayments must be taken care of before you decide to prepay a huge amount on the mortgage while bigger debts hang on your head.
Prepaying advances on your mortgage loan may give you an anxiety-free life. You will be able to save enough by getting rid of a long term debt if you suddenly have a lot of money to spare over the cause. But given all the other situations of inevitability or emergencies, you must take into consideration all the aspects of prepaying the loan amount. Make wiser decisions on which debts you want to let go of first.
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