We know you’re probably thinking while clicking into this article, how can being in debt be a good thing?
That’s kind of a bizarre notion, but we’re here to break it down for you.
Even if you don’t even need to take up a home loan – if you already have enough money to pay for your house in full – you might still choose to do so when buying property in Singapore. Why? A loan, when managed well, can be the biggest catalyst for growing your money. Here’s how:
1. You can grow your money quicker
It’s easy to be misled to the conclusion that taking up a loan and having to pay interest is almost like giving money away to the lender.
False! Home loans incur the lowest interest rates out of all other types of loans, which means even if you’re able to pay for a property with your cash savings, you might still want to take up a home loan instead. You free up your cash savings by doing so, and you can then channel that cash into investments that yield higher returns than the interest rate of your home loan.
As an example, suppose you’ve got enough savings to buy a $500,000 HDB flat.
Scenario 1: You pay for it in full. (Our only question: How did you become such a baller?!)
You don’t incur interest on any loan, but that also means you’ve emptied your cash savings to finance your HDB flat.
Scenario 2: Since a HDB loan can finance up to 90% of your HDB flat purchase, you only pay $50,000 as down payment and take up a $450,000 HDB loan over a 10-year period. You then use your remaining $450,000 cash savings to invest.
The interest rate on a HDB loan is 2.6% per annum, which means you would’ve repaid a total of $511,516.74 at the end of the 10-year tenure.
But with the precious $450,000 that you’ve invested? Let’s say it yields a decent 6% annual return – an average return for a low-risk investment. In 10 years, you would’ve earned $599,510.71.
In other words, you would’ve actually earned $599,510.71 – $511,516.74 = $87,993.97 by taking up that HDB loan.
2. You’ll still have liquid assets
The more you’ve paid off for your home (rather than owing it to the bank), the more home equity you would’ve built. That’s a great thing, but at the same time, it doesn’t mean you should be locking up all of your savings in financing your home.
The reason is that home equity is an “illiquid asset”, which means it’s tied up and can’t be easily accessed or spent (the only option would be to sell your home); it’s good practice to hold some liquid assets in the form of cash, so that in the case of an emergency or whenever required, you’ve got finances readily available to relieve the pressure.
3. You can boost your credit score
A good credit score makes it easier for you to finance other purchases like car loans, or even another home loan in the future. Here’s a hack: You might even stand a higher chance of getting approved for credit cards that offer better rewards, even if they’ve slated minimum income levels that you haven’t yet hit!
Your loan repayment history is one of the ways that your credit score is assessed, and so paying off your monthly home loan repayments is a great way to accumulate a good credit score.
Taking up a home loan
So yes, being in debt can be a good thing if you’re smart with the way you manage your finances.
With the option of taking either a HDB loan or any of the loan options from various banks when buying a HDB flat in Singapore, you’ve also got more flexibility to choose a loan that best fits your lifestyle and financial health. For instance, HDB loans have a relatively fixed interest rate (it’s been constant at 2.6% per annum for years) whereas bank loan interest rates typically start out lower but tend to fluctuate more. Here’s our HDB loan vs bank loan comparison if you’re curious!
And that’s also great news because now, you’ll just need 10% of the purchase price of the property to be a proud homeowner – definitely much more achievable if you look at it this way!
Time to start home-shopping?