At first glance, the answer seems pretty obvious to most people. Short loan tenor means less interest to pay over the loan tenor, so it must be better right? Well, we wish everything were as straight-forward. After all, there’s a reason why there are so many types of home loans with various interest rates in the market. If it is just about choosing the one with the lowest interest rates, it wouldn’t quite make sense for banks to push out so many different loans with different rates right?
But yes, choosing a shorter loan tenor definitely lets you save on the interest payments, but there are a bunch of other things to consider. So let us play devil’s advocate here today to let you know why there are a few advantages to choosing a longer loan tenor.
But first, let us get a few facts right…
Since the implementation of cooling measures in 2013, the Monetary Authority of Singapore(MAS) has limited the maximum years of loan tenor for private properties to be at 35 years and 30 years for HDB. On top of this, the total loan tenor should not extend past age 65 for the borrower.
As a general rule of thumb, most people would try as much as they can to get a loan tenor that is shorter yet affordable on a monthly basis. This especially makes sense if you are paying down a property for your own stay since you probably do not want to be saddled with debt into your old age when you still need to service your monthly repayments when you are no longer earning an income.
On the other hand, if you are buying a property for investment purposes(collect rental income), it may not matter so much in terms of how much interest you are paying as long as the rental income can cover the monthly repayments. While your tenant is technically servicing your home loan for you, you will also most likely make capital gains when it comes the time to sell your property. Thus, it may make sense to go for a longer tenor in this case so as to keep the monthly repayments lower and affordable, or ensure that you do not need to put up extra cash from your own pockets.
Reasons For A Longer Tenor
1. More affordable monthly repayments. One of the most compelling reasons for someone to opt for a longer tenor is to ensure that paying their mortgage does not crimp their lifestyle. Many home buyers tend to forget about other costs they need to service when it comes to a new home purchase – fire insurance, property taxes, condominium maintenance fees, utility bills, renovation and getting new furnishing. All this can feel like a lot of money at the start, so you may want to ease yourself into your monthly financial commitment by starting with something lower. After all, you can always refinance in the next few years!
2. More leeway for rate hikes. Stretching out your loan tenor can give you more leeway to prepare for a future rate hike. Your home loan is a long term commitment and within that 20 to 30 years period, you can expect interest rates to go both up and down. While lower interest definitely will help you, a rising interest spells bad news, especially if you’ve made no contingency plans. This is why you should reconsider paying the maximum you can now as you risk overextending yourself if when interest rates increase in the future.
3. Makes more sense for property investors. Since your monthly repayments for your investment property will most likely be serviced by your rental income, you’d probably want to keep it as low as possible so that you do not need to top up your repayments with your own cash. Other than this, there is an even more important reason to take on a longer tenor. If you own a few properties or are planning to acquire more later on, you want to make sure you pass your total debt servicing ratio. With a lower monthly debt, this can help in keeping you within the debt servicing limit.
In deciding your loan tenor, affordability should be your top concern since you risk losing your property if you fail to repay your monthly loans regularly. The other important criteria has to do with the use of your property. If it is an investment property, taking up a longer tenor may actually do you more good than harm. Another word of advice – remember to refinance your loan every few years to ensure that you get the best rates possible in the current market! Need more advice? You can contact us for a free mortgage consultation here!