We know what you’re thinking as you read this: how can being in debt be a positive thing?
That’s a strange concept, but we’re here to explain it to you.
Even if you don’t need a home loan and have the money to pay for your house in full, you may choose to do so while purchasing property in Singapore. Why? When managed properly, a loan can be the most powerful accelerator for expanding your money. Here’s how it’s done:
1. Your money will rise faster.
It’s easy to be mislead into thinking that taking out a loan and paying interest is essentially giving money away to the lender. False! Home loans have the lowest interest rates of any sort of loan, so even if you can pay for a property with cash saved, you may prefer to take out a home loan instead. This frees up your cash savings, which you may then invest in investments that produce higher returns than the interest rate on your home loan. Assume you have enough money to purchase a $600,000 HDB flat.
It’s easy to be mislead into thinking that taking out a loan and paying interest is essentially giving money away to the lender. False! Home loans have the lowest interest rates of any sort of loan, so even if you can pay for a property with cash saved, you may prefer to take out a home loan instead. This frees up your cash savings, which you may then invest in investments that produce higher returns than the interest rate on your home loan. Assume you have enough money to purchase a $600,000 HDB flat.
Scenario 1: You fully pay for it.
You don’t pay interest on any loan, yet you’ve depleted your savings to finance your HDB flat.
You don’t pay interest on any loan, yet you’ve depleted your savings to finance your HDB flat.
Scenario 2: Getting mortgage loan
Because a HDB loan can finance up to 90% of the cost of your HDB property, you pay only $60,000 as a down payment and take out a $540,000 HDB loan over a 10-year period. You then invest the remaining $540,000 cash savings.
The interest rate on a HDB loan is 2.6% per year, so you’d have paid a total of $613,820.09 at the end of the 10-year term.
The interest rate on a HDB loan is 2.6% per year, so you’d have paid a total of $613,820.09 at the end of the 10-year term.
But what about the $540,000 you’ve put in? Assume it provides a 6% yearly return – the average for a low-risk investment. You would have gotten $719,412.85 in ten years.
In other words, by taking out the HDB loan, you would have earned $719,412.85 – $613,820.09 = $105,592.76.
2. You will retain your liquid assets.
The more you’ve paid off your mortgage (rather than owing it to the bank), the more equity you’ll have. That’s excellent, but it doesn’t imply you should use all of your savings to finance your property.
The more you’ve paid off your mortgage (rather than owing it to the bank), the more equity you’ll have. That’s excellent, but it doesn’t imply you should use all of your savings to finance your property.
The reason for this is that home equity is a “illiquid asset,” which means it’s locked up and can’t be easily accessed or spent (the only option would be to sell your home); it’s a good idea to keep some liquid assets in the form of cash on hand, so that in the event of an emergency or whenever it’s needed, you’ll have funds readily available to relieve the pressure.
3. Improve your credit score
A good credit score makes it easier to finance future purchases such as auto loans or even another home loan. Here’s a tip: You may even have a better chance of being approved for credit cards with better rewards, even if they have set minimum income thresholds that you have yet to meet!Paying off your monthly home loan installments is a wonderful strategy to earn a strong credit score because your loan repayment history is one of the ways your credit score is reviewed.
A good credit score makes it easier to finance future purchases such as auto loans or even another home loan. Here’s a tip: You may even have a better chance of being approved for credit cards with better rewards, even if they have set minimum income thresholds that you have yet to meet!Paying off your monthly home loan installments is a wonderful strategy to earn a strong credit score because your loan repayment history is one of the ways your credit score is reviewed.
advantages of getting a home loan in Singapore
