Interest may be coming down soon, but at a historically-elevated level, some homeowners might still wish to do some partial prepayment when they next review their home loans in Singapore.  Is paying down the outstanding loan the best course of action to take to save on interest cost?

Since amortization, or P (principal) plus I (interest), is essentially a play on four variables, there are four known ways to cut your mortgage interest of which paying down on the outstanding loan is just one.  There are other ways where the benefits may be less obvious but they can be equally effective at reducing interest burden.  We will look at them one by one in this article.

1. Interest Rate

That’s what most will base their decision on when choosing the best Singapore home loan packages.  From our observation, majority of homeowners will be obsessed with getting the lowest headline number, sometimes to the neglect of everything else.  Yet, there’s another group who will reckon that it’s too much trouble to refinance for that little bit of difference in rates and decide to forgo the savings and simply reprice (recontract with the current bank).

Being in the industry for more than a decade and with good hindsight of how interest rate cycles played out from 2014 to 2024, this is what we have to say:  

It’s not how much you pay now, but how much you could be paying a year from now, which makes the most significant difference to your savings.

To give you an analogy, it’s like negotiating to buy a condo and giving in to seller’s demand for $1,500 psf instead of holding out your offer at $1,450 psf.  Two years later, you might rue your decision when market valuation rises to $1,800 psf!  Conversely, you may gloat over a small win at $1,450 psf instead of paying up $50 psf more, only to find yourself in negative equity when the broad market nosedives to $1,200 psf.

Getting it right in big cycle moves is much more imperative than in small win in price negotiations.  Similarly when it comes to mortgages, we have many real life stories to share. We’ve seen homeowners who got seduced by lower headline floating rates of 1 per cent back at the start of 2022 but live to regret being trapped in a 3-year lock-in period when interest rate escalated at record pace afterwards. Fast forward a year later in 2023, again we see homeowners scrambling to commit to 2-year fixed rates as high as 4 per cent against our advice.  Within a span of 18 months, fixed rates have now tumbled to below 2.60% (effective rate) for the same 2-year fixed.

What’s the sure-fire way to save on interest then? — Don’t just focus on the headline rate and simply choose the lowest number.

Overcommitting to a mortgage has turned out to be the single most costly mistake for many in cycle-turning years of 2014, 2019, 2020 and the current 2022-2024 which will continue into 2025.

Best thing you can do is to work with a professional mortgage broker with the long track record and who have gone through more than a few cycles to give you that valuable perspective of how to get it right — not just choosing the lowest number which is a no-brainer, or even worse, the highest gift voucher. You might end up being penny wise but pound foolish.

2. Principal Sum

To cut interest cost, the most obvious course of action is to pay down on the outstanding loan.  Indeed, we’ve witnessed an increase in the number of such requests during refinancing in the last two years when interest stayed at elevated levels.  What’s lesser known is the “opportunity cost” for deploying the cash used for repayment to achieve better financial outcome elsewhere.

I am not alluding to seeking out investments like S-REITs which we all know can pay good dividends of 6-7 per cent based on today’s beaten down prices, albeit that’s one of the options to be considered. I am not referring to investment asset classes which carry risk, but some other clever ways of using your funds where you can generate cash flow without much risk, and bring down some of your monthly commitments. Do read our blog for some of these clever ways of deploying your funds.

For HDB homeowners, you have to think twice before paying down as there’s no way for you to cash out or “withdraw” later other than selling the property. It becomes economically unwise if you end up having to sell your $600,000 HDB property and pay taxes to buy back agin just to unlock $100,000.  Even for private property owners, many are surprised to learn how hard it is to cash out on their property when applying for home equity loan as regulatory limits like TDSR and stress test interest had been tightened.   And that’s provided you still have the same or higher income to apply for the term loan later, which could be why you need to cash out in the first place.

For those with the spare funds but not knowing what to do for a higher return, perhaps one good alternative is to apply for a mortgage interest offset account which has the same effect as “paying down without actually paying down”.  This is a current account which pays you the same deposit interest rate as your mortgage interest, up to typically two-third of the funds you deposit in the account.   This means you have the flexibility to withdraw the funds as and when needed, or put it back anytime so that the interest component of the mortgage gets “offset” by the deposit interest. When you do that, more of your monthly repayment goes to reducing the principal outstanding.

3. Tenure

This is more an idea to bring down the monthly repayment rather than the interest.  Most homeowners baulk at the idea of stretching out their loan tenure over a longer period (subject to both age and regulatory limits) as it means paying more interest.

In reality, based on anecdotal evidence, most people will move house within 10 years and redeem the loan prematurely.  Of course, some will argue that you would have paid the bulk of the interest in the first 10 years of the loan.  Let’s look at a simple case study of stretching the loan tenure from 20 years to 30 years on an outstanding mortgage balance of $800,000.  As interest will rise and fall, we will use a long run average rate of 2.5 per cent and look at the total interests paid in the first 10 years.

Ceteris paribus, indeed you are paying more interest in the first 10 years with all else held constant.  How much more?  $17,439 ($175,834 – $158.395).  You can see this is about a year’s interest you are paying right now on a 20 years’ tenure.  In short, you are paying about an extra year of interest to the bank over the next 10 years by stretching the tenure and bringing your monthly repayment down by about $1,000 every month (from $4,239 to $3,161).  You cut the monthly repayment, but not the interest.

Does this make financial sense?  Look closely and you will see the bigger impact of a shorter loan tenure is not so much on saving a year’s interest, but how you effectively reduce the outstanding loan significantly by $350,311 in the first 10 years, compared to just $203,482 (on a longer tenure).  That’s paying down your debt by more than 70%!  You end up with an outstanding loan of $449,690 instead of $596,518 after 10 years (Year 2023 in the example above).

So, yes it makes financial sense but it comes with a tradeoff. With a longer tenure, that $1,000 cash flow per month you save on paying mortgages means you have a sum total of $120,000 ($1,000 x 12 months x 10 years) over the next 10 years which you can now divert to other purposes or investments which could yield you even higher return like what we discussed earlier.  That’s what you are paying for with that extra year of interest to the bank.  Even if you have no intention to re-channel it elsewhere for investment, you still retain the option of using it to pay down on the mortgage later.

In other words, you wouldn’t lose out much in terms of capital repayment by stretching out your loan tenure, other than an extra year of interest to the bank.  The next idea will show you how you could recoup that cost.  The upshot, depending on what you do, you might not necessarily suffer much loss in stretching your tenure.

Overcommitting to a mortgage has turned out to be the single most costly mistake for many in cycle-turning years of 2014, 2019, 2020 and the current 2022-2024 which will continue into 2025.  

What’s the sure-fire way to save on interest then? — Don’t just focus on the headline rate and simply choose the lowest number.

4. Monthly Instalment

Can you still save on paying the monthly instalment after pursuing some or all of the above suggestions?  The answer is yes.  How about shaving off another $50-100 per month by simply refinancing out to another bank whenever you are out of a lock-in and clawback period (the latter refers to a typical 3-year period in most mortgage contracts when you will be asked to return the legal subsidy should you leave early)?

You may think that’s too little for too much work.  Let me show you how this is equivalent to almost an entire year of mortgage interest saved!

From our experience, with free market competition, there’s almost always another bank that could offer you at least a 0.05-0.10 per cent difference in rates, which translates into about an average 0.20 per cent difference in total interest savings over a 3-year period!  The problem is most homeowners underestimate that savings and simply choose the easy way out by repricing and staying put with their current bank.  On a typical loan of $800,000 that’s $1,600 saved.  And if you add all the excess cash benefits (net of all the transaction costs like legal and valuation fees) included, we estimate the average savings every time you refinance is more like $2,000.  Depending on whether you spread this $2,000 savings over three or four years (due to clawback), you can shave off at least $50 a month from your monthly instalment, or more for bigger loans.

If we suppose that you seize every opportunity to refinance at least 6 to 8 times over a 30-year loan tenure, in order to derive maximum benefit from a free market, it adds up to almost $14,000 (7 x $2,000 per refinancing) which is almost an entire year’s worth of interest saved.

Finally, there’s one other ultimate way to save on paying this monthly instalment altogether! That’s to become Mortgage-Free In 6 Years after learning how to set up a whole autopilot cash flow system, when you choose to work with us on your mortgage.

For HDB homeowners, you have to think twice before paying down as there’s no way for you to cash out or “withdraw” later other than selling the property. It becomes economically unwise if you end up having to sell your $600,000 HDB property and pay taxes to buy back agin just to unlock $100,000.

Need more personalised advice?  Not only do we help clients navigate through the myriad of mortgage rates quick and fuss-free and get you the best home loan Singapore, we show you how to become Mortgage-Free in 6 Years! So, be it for residential or commercial property loan, work with us today and you’ll also be helping to support our social cause!

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Disclaimer: MortgageWise Pte Ltd is not in the business of providing financial advice nor are we licensed or regulated by MAS under the Financial Advisory Act (FAA) in Singapore. All information presented are opinions and any representations given, whether by way of example, illustration or otherwise, are purely portfolio allocation advice and not recommendations or inducements to buy, sell or hold any particular investment product or class of investment product.  All opinions are generic in nature and are not tailored to the particular circumstances of any reader.  Seek advice from a qualified financial advisor before making any investment decision.

Though every effort has been made to ensure the accuracy of the information and figures presented, we make no representations or warranties with respect to the accuracy or completeness of the contents in this blog and specifically disclaim any implied warranties or fitness for a particular purpose.  We shall not be held responsible for any financial loss or any other damages suffered whatsoever, directly or indirectly, if you choose to follow any of the advice or recommendations given in this blog.