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:
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.
You don’t pay interest on any loan, yet you’ve depleted your savings to finance your HDB flat.
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.
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.
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.