I would think that for most of us, the biggest loan we would need to take in our lifetimes is a housing/mortgage loan.
And unless you are a Crazy Rich Asian with the money to pay for your home in cash, the decision to take up a home loan is quite straightforward.
But, the next steps are when things get complicated.
Also, another critical decision a prospective homeowner must make is to choose between a shorter or longer loan tenure.
Based on the numbers alone, it would be hard to tell which is the better option.
Generally, if circumstances are almost perfect, a shorter loan tenure is usually the better option if you can afford it.
But as the ongoing Covid-19 pandemic demonstrates, life can get in the way of our most well thought out plans.
So the better question for any potential homeowner to ask is this: which option is best for you?
We got you fam.
To help you make a better financial decision, we will be doing a thorough comparison of the pros and cons of each option.
This would be especially helpful if you’re eyeing the February 2021 BTO launch .
How will a longer or shorter loan tenure affect the terms of your loan?
Before we dive into the comparison, here are a few things you should know about home loan tenures in Singapore:
According to the Monetary Authority of Singapore (MAS) the maximum loan tenure for housing loans is capped at:
- 30 years for HDB flats.
- 35 years for non-HDB properties.
HDB loan tenure
However there is an exception to this if you are taking up an HDB home loan a for an HDB flat , the loan tenure is capped at 25 years.
Another factor that affects the loan tenure you can take is the Mortgage Servicing Ratio (MSR) and the Total Debt Servicing Ratio (TDSR).
What is The Mortgage Servicing Ratio (MSR)
The MSR is a limit set by MAS that caps the amount that you can spend on mortgage repayments to 30 per cent of your gross monthly income.
It is applicable to any home loans taken up to buy an HDB flat or an Executive Condominium (EC) bought directly from the developer.
For salaried employees, do note that your gross monthly income comprises of your basic wages, overtime pay, commissions, tips, other allowances and one-twelfth of any annual bonuses. It includes employee contributions to your Central Provident Fund (CPF) as well as personal income tax. However, it does not include employer CPF contributions.
If you are self-employed, your gross monthly income refers to the average monthly profits from your business, trade or profession (i.e. total receipts less business expenses incurred) before deduction of income tax.
If your gross income is not enough, you will have to take a home loan with a longer loan tenure.
Pro tip: You can calculate your MSR using this calculator from PropertyGuru .
ALSO READ: The when and how of refinancing your home loan
What is The Total Debt Servicing Ratio (TDSR)
In a nutshell, the Total Debt Servicing Ratio (TDSR) limits the amount borrowers can spend on debt repayments to 60 per cent of their gross monthly income.
It is applicable to all property loans regardless of whether the home loan is public or private.
Do note that this applies to all your monthly repayment liabilities, including your credit card debt, personal loans , car loans etc.
Also, the loan tenure can also affect the interest rates of your home loans if you are taking a home loan from the bank.
Pro tip: You can calculate your TDSR using this calculator from PropertyGuru .
Pros of a longer home loan
With that in mind let’s look at the pros of taking up a longer home loan.
Pro 1: Better cash flow
When you take up a home loan with a longer tenure, you will enjoy better cash flow as you will have more money for your everyday needs.
This is mainly because your monthly repayments will go up exponentially as you reduce your loan tenure.
Let me illustrate.
Let’s say you wanted to buy a four-room Toa Payoh (Biddadari) BTO flat at a cost of $464,000.
Assuming you took up an HDB home loan with a tenure of 25 years , and qualify for the maximum loan-to-value percentage of 90 per cent, you will have to repay $418,000 over 25 years.
Currently, the interest rate for an HDB loan stands at 2.6 per cent per annum.
This would mean that the estimated monthly instalment for your loan is $1,897.
P.S. you can use this HDB loan calculator to for an estimate of your monthly loan instalments.
If you reduce the loan tenure to 15 years, you will have to pay $2,807 a month.
Reduce it to 10 years and you will have to pay a massive $3,960 a month!
And touch wood, if something happens and your income is affected or you need cash for an emergency, your cash flow will be severely impacted and you may have to take up personal loans with much higher interest rates to tide over.
In addition, you can actually use the freed up money to invest and keep up with inflation.
ALSO READ: 5 things to do when you can't pay your home loan
Pro 2: Flexibility to choose
One good thing about taking up a longer home loan is the flexibility granted.
If you are earning more, you can make early repayments on your home loan and save more on interest.
This option might be more forgiving if your circumstances are not ideal.
This perk works for HDB home loans which do not have any early payment penalties.
However, if you are taking a bank home loan, you will need to enquire about any early payment penalties and calculate if the interest savings you make from early payments are worth it.
Pro 3: A longer loan tenure benefits your TDSR
In addition, having a longer loan tenure means your monthly mortgage loan repayments will be lesser.
This means that your home loan does not take up as much of the TDSR limit which will free you to take up additional home loans to buy additional properties.
Cons of a longer home loan
On balance, here are the cons of taking up a loan with a longer loan tenure.
Con 1: More money paid in interest over time
The main drawback of taking up a loan with a longer tenure is that you will have to pay more money in interest over time.
Let’s use the previous example of the HDB loan amount of $418,000 with an interest rate of 2.6 per cent:
|Loan Repayment Period (in years)||25||15|
|Estimated Monthly Instalment||$1,897||$2,807|
|Total Interest ($)||$150,902||$87,242|
|Total Payment ($)
(Loan Amount + Total Interest)
|per cent of Total Payment Spent on Interest||27 per cent||17 per cent|
When opting for the longer loan tenure of 25 years compared to 15 years, you will be paying $93,760 more!
ALSO READ: Why you should not be rushing to pay back your housing loan using your CPF savings
Shorter home loan
On balance here are the pros and cons of a shorter home loan tenure.
However, there are a few general guidelines to consider before taking up a shorter loan tenure.
- Your monthly repayments are way below your TDSR/MSR even with a shorter loan tenure
- You are earning enough to build a healthy amount of savings
- You have enough in your CPF ordinary account to repay your home loans in you suffer a loss in income.
Pros of a shorter home loan
Here are the pros of taking up a home loan with a shorter tenure if you can afford it.
Pro 1: Less money paid in interest over time
As seen in the example above, the main benefit is that you pay less in interest over time.
Pro 2: Peace of mind
In addition, another benefit is that you get to enjoy a peace of mind and more freedom if you pay up your home loan faster.
By paying up the loan faster, you are relieving yourself of this financial burden.
This means that the sooner you are free from this financial burden, you can choose to take a break from work or switch to a lower-paying job if you are suffering from burnout.
These choices will be totally unable to you if you are still stuck with a home loan with a longer tenure.
Cons of a shorter home loan
And here are the cons of taking a shorter home loan.
Con 1: Higher monthly payments
As seen from the table above, you will have to make higher monthly payments.
For example, the estimated monthly instalment for a 25 year home loan is $1,897.
Whereas for a 15 year home loan you have to pay $2,807, or $910 more a month!
Con 2: Less affordability and flexibility
Depending on your salary, the higher monthly instalments will affect your cash flow.
Also, there is less flexibility as you are required to make those instalments every month.
Con 3: Your TDSR will be affected
If you have plans to buy additional properties, the shorter loan tenure might affect your TDSR limit.
This might restrict you if you want to buy more properties.
This article was first published in Seedly.