When you buy a property, you might wonder, ” Should I take a longer or shorter home loan? Which is better?” This is an important decision, because it will affect your long-term cash flow.
So, what’s the wise choice? Let’s weigh the pros and cons of choosing between a longer and shorter home loan.
Why a Longer Home Loan?
1. Cheaper monthly repayments
When you stretch your mortgage loan to a longer tenure, you can minimize your mortgage repayment amount per month, by up to 35 years (private properties).
As a home occupant/owner, you’ll have more spare cash for emergencies or bad times like temporary unemployment, sickness, or accidents. You’ll also have to pay other overheads, such as property-related taxes, fire insurance, maintenance fee, and utility bills.
2. Fluctuations in interest rates
You can leverage on floating interest rates in a longer loan tenure. If the interest is lower, you can enjoy more repayment savings.
Whereas a higher interest signals gloomy news, especially if you don’t have any backup plans. But if you have additional funds, you may save in the long run. Try settling the rest of the loan before the interest rates rise.
3. TDSR Reduction Possibilities
If you’re a full-time property investor, then investing in more properties will require additional capital. That’s why you may want to choose a longer, easier tenure, as it may help lower your monthly repayments.
With lower monthly debt, you can stay within the debt servicing limit and pass your TDSR test, so that your next loan application will be smoother to accumulate more properties.
Why a Shorter Home Loan?
1. Reducing Total Interest Costs
Rationally, most people (homebuyers) would work hard to get a shorter, but affordable loan tenure. It is more sensible to settle the remaining loan early or quickly.
Longer mortgage tenures usually cost you more in interest, on top of your monthly instalments. But once you have more income, you can always shorten your loan tenure for higher monthly repayments.
Imagine this: What if you still have to service your mortgage loan even when you’re at an old age? Especially if you have no source of income or have to cope with an illness. So, a shorter loan tenure can be the wiser thing to do.
2. Able to Pay Higher Monthly Instalments
If your income affords you to pay a larger monthly repayment (without risking late repayments), go for a shorter tenure. Otherwise, in the event of defaulting on repayments, you’ll face unwanted extra costs, such as overdue interests, and even legal suits for bankruptcy or foreclosure.
Shorter tenure loans can also assist you to prevent potential costs that a long-term debt may carry. These costs are processing fees for refinancing, lump-sum payment charges, and others.
3. Need for Improved Rental/Investment Yields
This is every property investor’s goal. A tenant servicing your home loan while waiting for the right time to sell your property, at a handsome capital gain.
Despite paying larger monthly repayments, a shorter loan tenure may give you better investment yields from a long-term outlook, because you can save from interest and other potential fees.
Planning to switch to a shorter or longer home loan?
To find out more on the Best Mortgages in Singapore, click here.
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