“Mortgage interest rate is going up, should I redeem my investments to pay off my mortgage loan?”
This was a question that was posed to me recently by a client.
With mortgage interest rate going up, homeowners who are on floating rates now have to pay a higher monthly instalment. But exactly how much more do they need to pay? Does an increment of mortgage interest from 2% to 4% mean that their monthly instalment doubles?
Let’s take a look at this scenario whereby the outstanding loan is $1M and the remaining loan tenure is 25 years.
| Loan Amount | $1M |
| Interest Rate (per annum) | 2% |
| Monthly Instalment | $4,238.54 |
| Interest Rate (per annum) | 4% |
| Monthly Instalment | $5,278.37 |
| Monthly Increment | $1,039.83 |
From this calculation, the monthly increment is $1,039.83. Granted it can be financially painful to pay an additional of $1,039.83 every month in this case, but it definitely does not mean that the monthly instalment has doubled. To begin with, when calculating mortgage affordability before buying a property, homeowners should exercise prudence and assume an average interest rate of 3% or even 4% per annum. I have even seen homeowners who decide on their affordability based on just one person’s income, instead of combined income with their spouses.
While it does not make sense to pay more than what you have to on a home loan due to the current rising interest rates, it may not make sense to redeem all your investments to pay off your home loan and lose out on the opportunity costs. A fully paid property may not help fund for your retirement in the future. A wiser move would be to refinance or reprice your mortgage loan at the earliest possible time, which we would be able to help. Alternatively, seek ways to reduce expenses in other areas to tide through, or find ways to increase income. In extreme cases where homeowners are faced with negative cash flows, they can tap on money that they may not be aware of.
Unlike credit card debts which charge exorbitant rates of more than 20% per annum, mortgage loans are considered good debts as their average interest rates are much lower in the long run. Hence, if possible, we should not derail our long-term retirement plans or any financial goals due to short term market conditions.
Disclaimer: All information are for informational purposes only and should not be relied upon as financial advice.