Should you go for Longer or Shorter loan period? | Singapore Real Estate


Should you go for a longer loan period or a shorter loan period? Let’s work it out with a case study! Assuming your property value is $1m. Loan 75%=$750,000 Buyer’s Stamp Duty about 3%=$24,600 Assuming it’s your first purchase, no ABSD. Loan interest at 2% pa. Monthly instalment is $4,826 for a 15-year loan period. $2,772 for a 30-year loan period. Which one should you choose? 15-year or 30-year? Assuming you are 35-year old, so there is no issue if you go for 30-year loan. In order to decide, let’s assume you will sell your property in 10 years’ time. In 10 years, you would have paid 120 instalments. Total interest you paid is about $104K for a 15-year loan and $130K for a 30-year loan. On surface, it appears a 15-year loan is better because you pay less interest. Let’s work out your return on investment first. Assuming your capital gain is 3% per year, which is reasonable if you consider inflation and if your property is located in a growth area. In 10 years, your property value would be $1.3m. Minus away your downpayment, buyer’s stamp duty, legal fees, agent fee, outstanding loan and instalments paid, you have a net gain of about $136K for 15-year loan and $110K for a 30-year loan. Including your rental return assuming you are renting out and minus your rental expenses, you have a net return of about $234K for a 15-year loan and $208K for a 30-year loan. You will notice I used 90 months instead of 120 months for the rental revenue. This is to provide for vacancy while you are marketing your property for rental. Your return on investment is 85% for the 15-year loan and 76% for the 30-year loan. Again, on surface, it appears 15-year loan is better. What many people have forgotten is the difference of $2,054 in monthly instalment. Or about $246K over 120 months. If this difference of $2,054 is put into a 2% fixed deposit recurring every month, it will generate an additional interest of about $26K. Now your return on investment is 86%, on par with the 15-year loan. If you were to invest the difference in say a 6% REITS instead, then your return on investment shot up to 109%. You see 30-year loan is better now. It gives you the flexibility to invest in something higher than the loan interest rate which is 2%. As long as you can generate a return better than the loan interest rate, you are better off choosing a longer period loan. Even if you were to generate the same interest return, you are still better off because your monthly instalment is much less and thus, less stressful. If you want to learn more, make sure you subscribe to my channel so that you will get notified of new episodes. In the meantime, check out these 2 videos! Bye!

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