Should you pay off your monthly mortgage early or invest?

Key insights

• Assuming an initial home loan of $200,000, investing the amount into an STI ETF like the Nikko AM can produce returns nearly 10 times as much as the total interest paid on a HDB loan.
• Paying off the mortgage early - then running into cash flow issues - can cause you to pay more than $20,000 worth of installments when you resort to taking out a personal loan.
• Paying off your mortgage early saves you on interest payments (more than 50 per cent if you pay off a $300,000 loan in five years, compared to 10 years).

Singapore’s housing market is among the most expensive worldwide. For instance, the average cost of an HDB property listing is $532,768 or $507 per square foot.

Compare that to the average monthly salary of $5,783, and it isn't difficult to see that many Singaporean homeowners will need to use debt (i.e. take out a home loan) to afford property.

For those fortunate enough to have extra cash in hand after a few years of homeownership, they may find that paying off the outstanding mortgage may not necessarily be the wisest choice – mainly since the option of refinancing or investing are available.

Can investing give you better rates of return?

One of the biggest reasons homeowners wish to pay off their mortgage early is that it cuts down on interest payments.

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The current concessionary interest rate for a HDB loan is 2.6 per cent per annum and anywhere between 1.95 per cent to 2.8 per cent per annum for bank home loans.

However, it's worth noting that investing on your own could help you achieve better returns.

For instance, you might consider investing in STI ETFs. These are the blue-chip stocks available in Singapore's economy (e.g. DBS Group Holdings and Singapore Telecommunications Limited).

The annualised returns from SPDR STI ETF stands at six per cent since its inception in 2002, while Nikko AM STI ETF reports a 6.49 per cent since its inception in 2009.

Returns from investing in Nikko AM STI ETF vs. total interest paid on loan

If you have a low-risk appetite, don't worry. There are plenty of low-risk investment options available. A good example would be the Singapore Government Bonds (SGB), where the coupon rates (i.e. yields) can go up to 3.375 per cent per annum, depending on the maturity date.

Investments offer you liquidity that can bolster your finances whenever necessary

Another reason you should invest the additional cash on hand is that various investments offer you the benefit of liquidating them when the need arises (e.g. when you unexpectedly lose your job).

You could sell off your stocks or bonds, like the Singapore Government Bonds mentioned above, to get back the 'face value' and whatever interest you've accrued on it.

Ultimately, it's worth remembering that there’s no point in paying off your home loan early – and then being forced into high-interest personal loans because of cash flow issues.

Returns from investing in Nikko AM STI ETF vs. total interest paid on loan

Remaining Loan Balance For 20 Years/$	Total Interest Paid (HDB, 2.6 per cent)/$	Total Interest Paid (Personal Loan, 3.48per cent)/$	Difference/$
200,000	56,698.26	77,887.61	21,189.35
300,000	85,047.40	116,831.42	31,784.02
400,000	113,396.53	155,775.23	42,378.70

Should you pay off your mortgage early?

However, paying off your mortgage could indeed bring about various unique benefits. You’ll not have to deal with the mental stress of having to fork out a monthly sum from your take-home salary. Also, should the economy recover, interest rates may rise in the future.

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After all, the historical interest rate for Singapore loans is close to four per cent.

Another reason you might want to pay off your mortgage early is that doing so could translate to higher cash proceeds when you eventually sell your house.

This is because of CPF’s accrued interest rule where if you use CPF to pay for your home, and you sell your house before you turn 55: you will have to 'refund' your OA with what you would have earned if you left that money in CPF.

On the other hand, if you refinance your current home loan (as long as your lock-in period is over), you can opt for a mortgage package with a lower interest rate.

How loan repayment time impacts interest rate amount

Years	Total Interest Paid (HDB, 2.6 per cent) On Initial Loan Amount Of $300,000/S$	Total Interest Paid On Initial Loan Amount Of S$300,000 (Bank, 1.29 per cent)/$
Five	20,246.81	9,940.00
10	41,011.16	19,926.91
15	62,613.70	30,121.19
20	85,047.40	40,522.59

Consider your unique financial situation when making a decision

Ultimately, the choice of whether to pay off your mortgage early, refinance , or invest the sum of money lies with you; you need to assess your circumstances in life to decide which is the right financial decision (e.g. always pay off other higher-interest debts first if you have them).

If you haven’t done so already, consider using a home loan refinance calculator to understand the best rates and calculate whether refinancing can help you save money in the long-run.

This article was first published in ValueChampion.