When most people choose their mortgage loan package, they often ask themselves whether they want to go with a longer or shorter loan term. A shorter tenure would mean lesser interest paid and also the idea that you get to finish the repayment earlier in life sounds great. Meanwhile, a longer loan tenure means lower monthly installments and better cash flow for your everyday life
So which do you think is better?
In this article, let us explore the pros and cons of the different loan tenures.
To illustrate, let us first take a look at an example below.
In general, people refinance their mortgage every 3 years to make sure they are on the best rates. Most people also have plans to sell/upgrade their property after 3-5 years once their family size and income grow. Therefore, the calculations below are based on a 3-year period
For a loan of $1 million @ 2% interest rates. Let’s look at the difference in the monthly installments between a 15-year and 30-year loan tenure.
Let us first look at the monthly repayment amount from this example. Certainly, when you double the time of the loan tenure, the monthly installment is lowered by almost half. As we can see from the table above, the 30-year loan tenure will save you $2,739/mth extra compared to the 15 years tenure. After 3 years, you will have $2,739X 36 months = $99,684 extra in terms of cashflow.
So how much extra interest did we have to pay to enjoy $99,684 extra cash flow for the 30-year loan?
After 3 years, the total additional Interest you have to pay between the 30-year and 15-year tenure is…… wait for it……$2,931, which works out to be an extra $81 interest a month.
Does this calculation shock you?
You accumulate an extra $99,684 in cash flow over 3 years, and the extra interest works out to be only $81 extra a month for the 30-year loan.
So you might be wondering… why is this the case?
First of all, you need to know that interest on your mortgage loan is charged on the outstanding loan amount.
The outstanding loan amount in the first few years of the loan term is very similar between a 15-year loan or a 30-year loan. As seen in the example above, the difference is marginal.
The main difference will come in if the loan is held till the end of the tenure. However, most people tend to sell or upgrade after a few years. Otherwise, one can also arrange a prepayment to the loan when necessary.
So there you have it; there are many benefits to having a longer loan tenure.However, if you happen to fall into the category where you have too much money sitting around and you won’t need to worry about cash flow issues and you also do not believe in investing, you can consider fully paying off your mortgageHaving said all these, there is no one right answer when it comes to how long the loan tenure should be.
Hopefully, these pointers will be useful for homeowners to assess their own standing and preferences. If you have any personalized questions, feel free to speak to one of our expert mortgage advisors by contactings us at (+65) 6631 8980 (main line). Do leave us a comment in the section below! Follow us on Facebook, Instagram and website for a daily dose of quick financial tips and deals! Thanks for reading!