Should I opt for a longer or shorter loan tenure?

Longer tenure vs shorter tenure for mortgage loan in Singapore

Should I opt for a longer or shorter loan tenure?

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Owning your own home is a huge milestone in life. Yet, it’s also a significant financial commitment. In deciding your loan repayment plan, a determining factor would be the loan tenure. 

A common misconception is that a longer loan tenure would prolong the loan repayment period and greatly increase the number of interest payments. 

However, that’s an inaccurate assumption. The absolute interest that you pay is not necessarily substantially higher under a longer tenure. This is because the computation of monthly housing loan instalments is different from that of monthly car loan instalments.

For car loans, the interest payable is based on the original loan amount. The interest rates remain constant throughout the loan tenure, i.e. car loan monthly instalment = [loan amount + (loan amount x interest rate per annum x no. of years)]/no. of months in loan tenure. 

On the other hand, mortgage loans are amortised. The interest payable is dependent on the outstanding loan balance, which diminishes over time.

Having cleared this misconception, here are 4 reasons for why you should opt for a longer loan tenure for your mortgage loan.

A wife with her arms around her husband, discussing their loan tenure for their home loan in Singapore

1. A longer loan tenure helps you to manage your cash flow better

Some property owners may choose a shorter loan tenure as they’re eager to pay off their loans as soon as they can. 

However, this would mean higher monthly repayments. Many homeowners often fail to account for other costs associated with homeownership, such as property taxes, utility bills, etc.

Hence, paying higher monthly housing loan instalments may result in them having to stretch their monthly expenditure to the limit.

Conversely, opting for a longer loan tenure reduces your monthly housing loan instalments. 

This, in turn, grants you more disposable income and lightens your financial burden. 

Should there be an unexpected turn of events such as income loss or a cash flow crisis, a longer loan tenure can cushion the impact.

2. A longer loan tenure helps you to reap more benefits from your investment

If you’re investing in a property, your main objective would be to reap the benefits of capital-appreciation – the increase in the value of your property. 

As property prices do not soar overnight very often, another way to make money from your property, in the long run, is through rental income. It would be best if the rental income you collect exceeds the monthly instalment you have to pay for the housing loan. 

One strategy to achieve this would be to keep the monthly repayment costs as low as possible. To do that, you have to opt for a longer loan tenure.

3. A longer loan tenure serves as a safety net

Repaying your loan is a long-term plan. Given the uncertainty of the global economy today, the market is volatile and interest rates are expected to fluctuate. 

A longer loan tenure thus serves as a useful buffer. You’ll not be rendered vulnerable to any sharp increases in interest rates.

4. A longer loan tenure benefits your TDSR

The Total Debt Servicing Ratio (TDSR) was introduced by the Monetary Authority of Singapore (MAS) on 28 June 2013. It ensures that Singaporeans borrow within their means to finance their property loans, thus maintaining financial prudence. It also prevents the overheating of the real estate market.

TDSR restricts the amount an individual can borrow to finance their property loan to 60% of their gross monthly income. This takes into account their other financial commitments, including personal loans, car loans, study loans, equity loans and credit card bills.

Here’s a quick look at how TDSR is calculated using fixed income:

Fixed monthly income$10,000 
Total debt obligation per month (car loan, personal loan, credit card)$4,500
TDSR threshold per month60% of $10,000 = $6,000
Maximum repayment for mortgage loan per month$6,000 – $4,500 = $1,500

Read more about TDSR here.

By having a longer loan tenure, the monthly mortgage loan instalment will be lesser. This benefits your TDSR when you are planning to buy your 2nd, 3rd and subsequent properties.

Learn more about how you can own a second property without paying ABSD here.

A woman counting the emergency cash fund that she saved from opting to a longer tenure for her home loan in Singapore

Overall, a longer loan tenure offers several benefits for your mortgage loan. So the next time you take out a mortgage loan, don’t rush to opt for a shorter loan tenure in a bid to save on the interest. 

Have further queries on your mortgage loan? Feel free to contact us for a chat.

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