Should You Pay Off Your Monthly Mortgage Early Or Invest?

If you’re a homeowner with a mortgage and extra cash on hand, you’re likely struggling with a dilemma: Should you pay off your mortgage, refinance, or put the money to work in investments to build a nest egg? Let’s compare the choices against each other to find out which nets a greater return.

ValueChampion Editorial Team

by ValueChampion Editorial Team on Apr 26, 2024

yellow house

Key Insights

  • Assuming an initial home loan of S$400,000, investing the amount into an index fund like the S&P 500 can produce returns over 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 tens of thousands of dollars worth of instalments if you you have to resort to taking out a personal loan.
  • Paying off your mortgage early saves you on interest payments (more than 50% if you pay off a S$300,000 loan in 5 years, compared to 10 years).

Singapore’s housing market is among the most expensive worldwide. For instance, the average cost of a four-room HDB apartment is S$609,674. Compare that to the average monthly household income in 2023 was S$10,869, 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.

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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. The current concessionary interest rate for a HDB loan is 2.6% per annum and anywhere between 3% to 5% 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 the S&P 500. It is the ETF that tracks the blue-chip stocks available in the US economy. The annualised returns from the S&P 500 stands at 10.26% since its inception in 1957 to 2023.

Estimated Returns From Investing In The Stock Market vs. Total Interest Paid On Loan

Remaining Loan Balance For 20 Years/S$Total Interest Paid (HDB, 2.6%)/S$Total Interest Paid (Bank, 3.5%)/S$The S&P 500 (10.26% Annualised Rates)/S$

The reason for the massive difference in interest payable on your home loan and the potential capital gains when investing in the stock market is that your capital gains each year can be reinvested and compounded over the course of the 20 years, exponentially increasing your earnings, compared to a home loan where by you will be paying less and less interest on the loan as you pay down your principal amount over the course of the 20 years.

The very important caveat here is that the stock market does not give you guaranteed returns. While it seems like a no brainer to invest if the returns for an index like the S&P 500 averages 10.67% as compared to your 4% mortgage loan interest, if it is a down year for the stock market, that would paint a very different picture. You should only go the route of investing in the stock market if you have the risk appetite for it. 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 Treasury Bills, where the coupon rates (i.e. yields) can go up to 3.75% 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 Treasury bills mentioned above to help tide you over such times of financial stress. 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.

Remaining Loan Balance For 20 Years/S$Total Interest Paid (HDB, 2.6%)/S$Total Interest Paid (Personal Loan, 3.48%)/S$Difference/S$
300,000 85,047.40116,831.4231,784.02
*Table showing how much more in instalments you have to pay with a personal loan (3.48%) compared to a HDB loan (2.6%).

Related: The Best And Worst Ways To Use a Personal Loan

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, as we have seen in recent years, interest rates rise and fall with macroeconomic fluctuations. Paying off your mortgage loan now at its current rates can help prevent against being forced to refinance your home loan years down the road at potentially even higher rates.

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 may even be able to opt for a mortgage package with a lower interest rate.

How Loan Repayment Time Impacts Interest Rate Amount

YearsTotal Interest Paid (HDB, 2.6%) On Initial Loan Amount Of S$300,000/S$Total Interest Paid On Initial Loan Amount Of S$300,000 (Bank, 3.50%)/S$
*Table showing how the amount of interest increases exponentially as the amount of time taken to repay the loan increases.

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 our home loan calculator below to understand the best rates and calculate whether refinancing can help you save money in the long-run.

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