With anxiety related to the COVID-19 and the economic uncertainty around financial markets, interest rates worldwide have been lowered to stimulate economic growth, encourage borrowing and spur investing. Whether you’re repaying your home loan or looking to invest in property, it’s worthwhile to take a step back to analyse your situation before making a move.
What’s the market like now?
On 10 June 2020, the US Federal Reserve announced that it would likely keep interest rates close to zero until 2022 to help the economy weather the negative impact of the coronavirus pandemic.
This quantitative easing measure is significant, considering that it was just a few months back in March 2020 when the US central bank made its biggest interest rate cut since 2008 by slashing rates by 0.5.
Correspondingly in Singapore, interest rates registered a significant decline. Banks across the country that tag their loan interest rates to the Singapore Interbank Offered Rate (SIBOR) have lowered their interest rates.
Here are the latest SIBOR rates as of 21 December 2020, according to sibor.sg:
The three-month SIBOR as at December 2020 was considerably lower compared to a year ago. The rate in December 2020 was 0.40%. This, in comparison to 1.76% in December 2019, represents huge savings for big-ticket items like home loans.
So if you find yourself with extra money and are contemplating putting that into your mortgage and paying it off ahead of schedule, here are 4 reasons why that might not be the best idea for now.
Why you shouldn’t pay off your home loan in now
1. Savings on monthly mortgages with lowered interest rates
For those eyeing SIBOR-pegged mortgage rates, this could just be an opportune time to take advantage of the lower floating rate.
You could also take this chance to refinance your home loan, change the length of your loan, or swap your adjustable-rate mortgage to a fixed-rate.
While interest rates will increase eventually, they’re likely to remain low for some time due to the pandemic. This means that if you’re a homeowner with a mortgage loan, you’ll continue to have lower interest rates on your monthly mortgage payments for a while.
Since you can save on these monthly payments, you’re likely to have more spending money freed up and available.
Instead of paying down your mortgage loans with the additional finances, you might like to consider diverting this money elsewhere — such as with investment opportunities.
2. Investment opportunities
By not channelling your finances towards paying off your mortgage loan, you free up your money for other uses, such as starting a business or exploring various investment opportunities.
Lowered interest rates mean that you have a greater sum of money available to you. This creates a great financial growth opportunity to build up your personal wealth, especially if you did not previously have the financial ability to invest.
This article in the Straits Times highlights several good starting points for investing in a volatile COVID-19 era—such as diversifying, buying government bonds, and being careful to have an amount of funds in cash instead of investing every last cent.
3. Looking ahead and staying ahead
Even as Singapore enters phase 3 of reopening the country, the COVID-19 pandemic continues to affect our country’s economy.
It’s challenging, even for professionals, to predict or assume where the pandemic is headed, let alone individuals. This makes it extra important to prepare for a potential financial drought and difficult times in 2020.
4. Having cash flow for emergencies
The importance of available cash flow is another big reason not to pay off your home loan in 2021.
COVID-19 has created unprecedented circumstances in Singapore and has brought on severe repercussions all over the world.
With job and economic markets being unstable and unpredictable as they are, it’s impossible to tell what challenges life throws at you.
The last thing you would want is to have a financial curveball which you did not anticipate.
Having accessible funds and money on hand for unexpected medical or unemployment emergencies is not only a prudent but wise decision.
Preparing for your finances
The COVID-19 pandemic has caused unexpected financial strain for many, making it extra important for individuals to have ready and available financial resources.
As you contemplate the decision to refinance your home loan, it might be a good idea to talk to a mortgage broker. Why get bog down with the confusing literature and all that number crunching, when you can get experts to help you work out the implications of your housing debt?
While you might think swinging an extra few hundred dollars a month on your mortgage payment is simple, it might not be worth it if you’re skimping on important areas such as your retirement savings or your children’s university tuition.
Here at FinanceGuru, we seek to help you better prepare for your finances and the upcoming milestones in your life. We offer a service-free, no-obligation consultation on mortgage matters.
Our team of mortgage experts is also equipped to help you work out the maths on MAS’ recent initiative. While the calculations may seem relatively straightforward at first glance, the two available options to defer your home loan does result in ultimately paying more for your property.
Learn more about how you can optimise your home loan, and uncover potential ways to save you money and time. Get a non-obligatory assessment and loan product recommendations today.