Is it Worth It to Pay Your HDB Loan Early?

It’s no secret that the cost of HDB flats is a huge financial burden to many Singaporeans. Although it’s significantly priced lower than other private properties, taking care of your HDB loan repayment can still be challenging.

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But what if you had extra cash on hand? Should you pay off your HDB home loan early? Is it going to be worth it or should you just use the money for other investments?

The answer is not so simple. There are tons of factors you must consider when thinking about tackling this dilemma. Let’s discuss them below.

Here at OMY Singapore, you will discover the following:

Overview: Should You Pay off Your HDB Loan?

Paying your HDB home loan early surely has some benefits. Think of it like investing. When you do this, you can save a lot of money on interest. If you want to sell your house in the future, it’s also a wise move.

Let’s put it this way.

Imagine having a S$500,00 mortgage with a 2.5% interest and a remaining loan tenure of 20 years. You have an extra S$50,000, and you’re deciding whether to use this money to invest in something else or pay off your HDB loan. What’s the better scenario?

When you pay off your HDB mortgage payment, you can save over S$63,600 in over 20 years – that’s a lot of money.

But when you invest your money (at 3.5% interest yield per annum) over the same period, you can gain S$85,000, including your principal.

Considering this, the clear winner is surely investing. If you have the option to invest your money which gives you a higher interest rate than your home loan, choosing this option is a no-brainer.

What If You Really Want to Become Debt-Free?

Many Singaporeans were raised in an environment that taught them all kinds of debts are bad. However, that’s not true. Some debts are actually beneficial, especially when building your credit score.

That said, what if you insist on paying your home loan?

If you do this, you’ll get rid of interest payments, which will make way for savings in the long run. For instance, if you have a S$500,000 HDB home loan with a loan tenure of 20 years, you need to pay S$2,649 for your HDB monthly instalment. But after making a huge one-time payment of S$30,000 (example only), you only need to settle an HDB outstanding loan payment of S$2,249 monthly.

By paying off a chunk of your HDB home loan, you can save S$160 in your HDB monthly instalment. This money can go to other bills and investments. Over a 20-year period, you can save up to S$38, 400. That’s extra money in your pocket.

Based on the scenario above, it’s still worth it to pay your HDB loan if you have extra money that you won’t use for other expenses or investments.

Should You Pay Off Your HDB Loan Early? Disadvantages You Should Know

Before taking care of your HDB loan early repayment, you should first consider the following downsides.

It decreases your savings

Although making HDB loan early repayment definitely has its pros, there are still tons of situations where it won’t be the best decision for you.

If you want to pay off your HDB home loan early but it will significantly lower your savings, then you should think twice. It’s not a good thing to spend the majority of your extra cash on your HDB partial repayment and suffer financially if you deal with emergencies since it’s challenging to convert equity from this property into cash, or mortgage HDB for cash.

You may not have enough money to pay your high-interest-bearing debts in advance

It’s not a smart decision to pay off your HDB loan in advance because of its low interest, especially if you have other high-interest debts like credit card debt. If this is the case, it is wiser to pay back your high-interest-bearing debts before taking care of your HDB loan early repayment.

Your mortgage insurance or HPS will be useless

Insurance is another huge reason why you shouldn’t pay your HDB loan early. If you are covered under Home Protection Scheme or Mortgage Reducing Term Assurance for your property, your loan will be paid off 100% in events like terminal illness, disability, or death.

You need to cover prepayment penalties

Depending on your bank, you may have to deal with early prepayment penalties that negate the savings you made by paying your loans early. This is another reason why you should consider HDB redemption of mortgage loan.

You’ll be unable to refinance or reprice your bank loan

If you are servicing a bank loan instead of an HDB home loan, this is something you should think about. On bank loans, you may need o to reprice or refinance your loan every 3 years or so to get the best interest rates. However, many banks require you to have a minimum outstanding balance of around S$100,000 before you can do this.

More From OMY: Refinancing Vs. Repricing Your Home Loan In Singapore

When you pay the outstanding amount of your HDB home loan, you may reach this amount faster and you’ll be left paying for a high home loan rate until you totally repay it. Unlike repaying loans for private properties, you can take out a home equity loan to increase your minimum outstanding home loan if it goes below S$100,000.

Paying your HDB loan early is irreversible

If you’re wondering if should you pay off your HDB loan early, you should know that you cannot take back your money used for HDB loan early repayment. This may mean you may lose significant savings if you don’t plan your finances well.

For instance, you may have used that money to start your own business, or travel. This could be a potentially fulfilling venture.

Should You Pay Off Your HDB Loan? Advantages You Should Know

In all decisions you make, there are pros and cons that you should consider. That said, paying off your HDB home loan early surely has its advantages. In this section, we’ll take a look at some of them.

It’s like an investment

Let’s imagine you took out an HDB home loan of S$300,000 with a 2.6% interest rate. For this loan, you need to pay S$1,604 as HDB monthly installment for the next 20 years of your life. Just like other Singaporeans, you service your HDB loan payment by CPF.

Imagine if you get a S$10,000 cash bonus for Chinese New Year. How awesome would that be? And what if you decide to use that extra amount for HDB loan partial repayment? This will decrease your HDB outstanding loan from S$300,000 to S$290,000. Therefore, your HDB loan balance is less than what it was before.

Assuming you still need to pay back your HDB outstanding loan in 20 years, your monthly HDB loan payment will be lessened to S$1,551 from S$1,604. This means you only save S$53 per month, which you can keep in your CPF account. This extra money can earn 2.5% interest from your CPF and in over 20 years, you’ll have an additional S$16,628 more in your account compared to if you did not pay off your loan.

You can make early payments AND diversify your portfolio at the same time

Imagine you had an extra S$2,000 cash every month. You may use this to invest in stocks, but smart investors know that the best thing to do is to diversify your investments because putting all your eggs in one basket is dangerous for your money. After all, you can’t predict the future and you need to split your extra money into a mix of high-return yet high-risk and low-return yet low-risk investments.

For this example, let’s split your S$2,000 into two. Around S$1,200 can be for stocks that yield 7%, and the remaining S$800 will be for bonds that yield 2%.

The more asset types you have in your portfolio, the better. What if you use your money in a different way? S$1,200 will be for stocks that yield 7%, S$400 will be used to invest in bonds that yield 2%, and the remaining S$400 will be used to pay in addition to your HDB instalment payment. For this, the yield is 2.5%.

With this in mind, you’ve diversified your portfolio in many ways. While the difference isn’t huge, savvy investors know that it’s a good strategy.

The accrued interest is attractive

Another less obvious benefit of paying back your home loan in advance is your accrued interest. This only applies to individuals who want to sell their house before turning 55.

CPF has an accrued interest rule where if you use your CPF to pay for your HDB and you sell your house before turning 55, you need to refund your CPF account with the money you’d have earned if you left that money in your account.

Let’s go back to the example above so you can understand this better.

For example, you took S$1,604 per month for your HDB CPF payment. If you kept this money in your account, it would compound to a staggering S$498,915 in a period of 20 years. If you sell your house for S$600,000 after this period, you need to pay back S$498,915 in your CPF account, so you only get to keep a little around S$101,085 for the sale of your house.

This doesn’t sound totally bad since you’re simply paying it back in your CPF account. However, this means you will have fewer cash proceeds from your home.

But if you settle your HDB house loan payment using your extra S$10,000, you only have to get S$1,551 from your CPF monthly to pay for it.

In a 20-year period, this would only lead to S$482,288 that you need to pay back to your CPF account. If you sell your house for S$600,000, you can get S$117,000 in your pocket.

You may escape rising interest rates

HDB loan payment is a massive financial commitment. You’ll spend years or even decades paying it off. However, remember that HDB mortgage payment has the lowest interest rates. Despite this, it may not last forever, especially considering the rising loan interest rates today. If you can pay back your HDB home loan early, you will decrease the possibility of dealing with higher interest rates in the future.

You can enjoy peace of mind

This is one of the most common reasons why a lot of Singaporeans want to pay back their home loan as soon as they can. When you have less amount to pay each month for your HDB mortgage payment, you’ll feel less stressed about your payment.

Experiencing less stress leads to tons of benefits in your life. For instance, this will motivate you to make better investment decisions for your future.

A Word From OMY

The answer to whether you should pay off your HDB loan early ultimately depends on you. There’s no right or wrong answer, and the best decision depends on your unique situation. Using HDB monthly instalment calculators like the HDB Home Loan Calculator and the CPF Monthly Instalment Calculator will help you make a more informed choice. You must also consistently check your HDB housing loan balance.

That said, if your main goal is to achieve financial freedom, you must know the difference between bad and good debt. This way, you can maximise your money’s potential.

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