How to Decide Your Mortgage Tenure (And When to Change It)
Applying for a home loan entails a lot of decision making, and that includes choosing the right mortgage tenure for yourself. In Singapore, the maximum mortgage tenure allowed depends on the type of property you’d like to purchase. According to the Monetary Authority of Singapore (MAS), the allowable home loan tenure can go up to 30 years for HDB flats and 35 years for private properties.
In practice, however, a realistic tenure may be less. For example, if you’re purchasing an HDB flat, your mortgage tenure is likely to be capped at 25 years if you take a 75% Loan-to-Value (LTV) loan.
In this guide, we will explain everything there is to know about your loan tenure and how it affects how much you pay for your home loan.
What Is Loan Tenure?
From the word “tenure” itself, which is a term of holding or possessing something, a loan tenure is the duration or the pre-arranged time period given for the borrower to fully repay the principal loan and interest to the lender. For example, a 25-year tenure means you agree to fully off the loan (including interest) in 25 years.
Some borrowers decide their loan tenure after they’ve seen the interest rate offered by their bank of choice, or after they have done a breakdown of the possible monthly repayments in various tenure scenarios, using tools like our mortgage calculator.
Possibly the most hassle-free approach during financing is to keep your original loan tenure. You can still apply to change your tenure after that, although it will be subject to the bank’s approval.
The lender may put you through another round of credit assessment and underwriting to determine if they should allow you to change the loan tenure or not. If you intend to shorten your tenure, you should also take note that banks may also charge a fee for this, to make up for the interest they will forego earning should they approve it.
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How Mortgage Tenure Affects Your Home Loan
In Singapore, your loan-to-value ratio (LTV) will be reduced if due to your preferred loan tenure, the loan will only be repaid after age 65. For bank loans, you would normally be allowed to borrow up to 75% LTV, but this is reduced to a maximum of 55% if your loan tenure is too long for your age.
For example, if you are age 40 and ask for a 30-year loan (i.e. your loan would be repaid at age 70), banks would only be allowed to offer you at most 55% of the loan amount, which may directly affect your ability to afford the property you were planning to get. On the other hand, asking for a 20-year loan would (assuming all other conditions are met) leave you eligible to borrow 75% of the property price.
The solution to this would of course be to ask for a shorter loan tenure, but there are limitations to this as well, as loan tenure will also affect your Total Debt Servicing Ratio (TDSR) (as well as Mortgage Servicing Ratio or MSR if you are buying an HDB flat), which affects your eligibility for any home loan.
To be eligible for a home loan, your total debt repayments each month (TDSR) cannot exceed 60% of your monthly income. For HDB flats, there is an additional requirement of the MSR, which means your home loan cannot exceed 30% of the same. Shorter loan tenures mean higher monthly instalments, which, depending on your financial situation, may exceed your TDSR and/or MSR. Hence, the tenure you choose to apply for may also affect your financial eligibility for a loan.
When Is A Longer Tenure Better?
It would be better for you to choose a longer mortgage tenure if:
1. You Want to Ensure Good Cash Flow
One of the best ways to manage your monthly cash flow better is by keeping your monthly repayments at a maximum of 30% of your monthly income. Although the MSR is only for HDB flats, it is a good guideline in general. Settle for a longer loan tenure if your repayments would exceed this figure, so you may also lower your monthly dues, and have more cash ready for emergencies and other necessities.
Longer tenures can also help you keep an investment property cash-flow positive. If you’re looking to earn revenue from your property, then what you want to do is keep your property cash-flow positive, allowing you to earn more money than it costs you to own it. For example, if you’re earning $50,000 per year from rent, and your total expenses on that property (including the mortgage, property tax, maintenance, etc.) are just $40,000 per year, then your property is considered cash flow positive.
The best strategy to make a property cash flow positive is to keep your mortgage repayments and your maintenance costs low. Choosing a longer tenure would be ideal if this is your goal since it may equate to paying for lower monthly repayments.
2. You Want to Reduce Your TDSR
TDSR is the maximum income percentage limit for servicing a loan, set by the MAS to also help keep borrowers from having too much debt. For home loans, the current threshold is at 60% of the borrower’s monthly income.
If you need more money to invest in another property or if you are planning for your next big purchase, choosing a longer tenure would be more strategic as it may help lower your monthly repayments, and also keep your TDSR at the right place for your next loan application.
3. You Want to Have More Tenure to Shorten If Needed
Although you may end up paying for more interest with a longer tenure, it can help keep your options open. It offers you the flexibility to shorten your loan tenure in case you already have enough money for higher monthly repayments, or if you’ve decided to pay off your home loan in full (which may be subject to charges, of course) before your original mortgage tenure ends. This could also be ideal if you are thinking to refinance your mortgage in the future.
When Is A Shorter Tenure Better?
On the other hand, you may benefit from a shorter mortgage tenure if:
1. You Want To Reduce Total Interest Costs
As mentioned above, longer mortgage tenures usually cost you more in interest over the entire duration of the loan. Go for a shorter tenure if you want to keep the interest on top of your monthly instalments as low as possible, although another option to lower your interest fees, if you can afford it, is to initially choose a longer tenure, then pay off your debt in full a few years before the completion.
2. You Can Afford to Pay Higher Monthly Instalments
If your income allows you to pay for larger monthly dues without feeling deprived or without putting yourself at risk for late repayments, it may be more practical to choose a shorter tenure. Aside from helping cut down on interest payments, it can also help you avoid potential costs that having a long-term debt may cause (i.e., processing charges for refinancing, lump sum payment charges, etc).
3. You Want Better Rental/Investment Yields
Although you’ll be paying larger monthly repayments, a shorter loan tenure may also give you better investment yields at a long-term perspective, considering the amount you can save from interest and other potential fees.
And since you’ll pay off the debt quicker, all the money you’ll get from rent will go directly to your passive income and the property’s maintenance, so there’s a huge chance that you’ll also get your return on investment earlier.
When to Change Your Mortgage Tenure
Both longer and shorter mortgage tenures have their advantages, but it all boils down to what’s best for you based on your financial capacity, and future goals.
Just know that you can always change tenures (for instance, shorten a 30-year loan tenure to half) if and/or when your priorities change (i.e., you want to invest in a new property or you want to start a business), or when your financial situation improves (but is still not enough to pre-pay lump sums).
Refinancing is a great way to adjust your loan tenures to reflect your current financial situation.
A mortgage’s lock-in period typically lasts from three to five years. If your income has increased in the intervening years, you may be able to manage higher instalments and pay off your mortgage faster. If you would like to prioritise paying off your debt faster in this case, it’s time to refinance to a mortgage with a shorter tenure once the lock-in (and clawback) period is over. You can also refinance if what you need is a longer tenure to accommodate lower instalments and ease cash flow.
Are you having a hard time deciding which loan tenure to go for? Do you want to know if it is the right time to change your tenure or to refinance? Our Home Finance Advisors can help you out – reach out to us to get started!
Still researching? Read more of our home financing guides here.
Other FAQ on Home Loan or Mortgage Tenure
What Is Mortgage Tenure?
Your home loan or mortgage tenure is basically the agreed length of time for repaying your debt (principal plus interest).
What Is Minimum Tenure for Home Loan?
According to the MAS, the maximum home loan tenure is up to 30 years for HDB flats and 35 years for private properties.
What Is the Minimum Loan Tenure?
MAS does not stipulate a minimum home loan tenure. It’s best you discuss this directly with your lender.
How Can I Increase My Loan Tenure?
Refinancing is a great way to adjust your loan tenure. Alternatively, discuss your options directly with your bank.
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