The year is coming to a close, and if you’re working for a company that awards bonuses to its employees, you’re probably looking forward to your year-end bonus. While many would spend their bonus on a holiday trip or a big-ticket wishlist item, homeowners could consider putting their year-end bonus towards paying off their home loan.
The lump sum of cash can be used strategically to improve your financial situation. From making housing loan prepayments to covering refinancing costs, we’ll go through how you can make the most of your bonus by putting it towards your mortgage. Have more questions? Ask our Mortgage Experts.
1. Pay down Your Principal
Instead of blowing your bonus on a fancy holiday, you could give yourself the gift of being out of debt sooner by making housing loan prepayments.
For those who want to pay off their mortgage as soon as possible, it would make sense to pay down your principal via housing loan prepayments whenever you can. Especially in a high interest rate environment, paying down your principal would reduce your monthly repayment amount and help you ‘save’ on your mortgage.
Making a lump sum payment directly towards your principal would also decrease the total interest you pay. Overall, the amount you would spend on your mortgage would be less than if you were not to make any housing loan prepayments. Typically, the minimum partial repayment amount you can make is $10,000 for banks (with increments in multiples of $1,000); for an HDB-granted loan, the minimum amount for partial repayment is $5,000 (with increments in multiples of $1,000 if your loan commenced on/after 1 April 2012).
However, there are some things to note before paying down your principal. Firstly, not all debt is bad debt. If you decide not to make a housing loan prepayment, this can mean you have more cash flow for investments or to build an emergency fund.
Secondly, you want to find out if there are housing loan prepayment penalties imposed during the lock-in period. Banks typically charge a housing loan prepayment penalty of 1.5% of the amount you have pre-paid for. In this case, refinancing your home loan may be the better option if your primary goal is savings.
2. Set up an Emergency Fund
If you are primarily making your monthly repayments via CPF savings, being employed is crucial. You don’t want to be in a position where you can no longer service your mortgage and have to sell your home.
By having at least three to six months’ worth of expenses saved, you will still be able to service your mortgage without a hitch in the event you do lose your job in Singapore. After establishing your emergency fund, you have the added option of paying off your mortgage with cash, CPF or both.
Even if you do not use your emergency fund, it doesn’t hurt to have cash savings on hand. The psychological safety net will put your mind at ease.
3. Cover Fees to Refinance Your Loan
If you choose not to pay down your principal amount or make a housing loan prepayment but still want to save on your mortgage, you could refinance your home loan instead. Refinancing your home loan is replacing your existing home loan package with a new, more competitive one from a different bank.
When you refinance, you could go for a home loan with a lower interest rate, switch from a floating rate to fixed rate home loan (or vice versa), and/or adjust your home loan tenure. A common reason why many refinance their home loan is to pay lower interest rates.
Mortgage rates in Singapore have come down from the highs seen at the end of 2022. They are expected to dip further as the US Fed is predicted to cut the benchmark rate further in 2025. A quick search on the PropertyGuru Finance mortgage comparison tool reveals the most competitive mortgage package (in terms of the lowest interest rate offered in the first year) is currently a 3-year fixed rate home loan with a 2.40% interest rate (as at 23 November 2024).
Refinancing costs, along with the related bank fees, legal, and valuation costs, can amount to about $3,000 or more. Using your bonus to refinance your loan could help you save more in the long run.
Look into refinancing your home loan if you are paying an interest rate higher than you would like and if your existing home loan’s lock-in period is coming to an end. Browse the latest mortgage packages using our home loan comparison tool.
4. Deposit into a High-yield Savings Account
Banks are currently offering high interest rates in the current interest rate climate. Putting your bonus towards a high-yield savings account earmarked specifically for mortgage payments could be a good move.
If you play your cards right and meet the various conditions, you could have a low-risk way to make your money work harder for you. Compared to what you may earn when investing the money, the preferential interest rate earned could give you safer returns.
Assuming you have about $20,000 in savings, credit at least $2,000 of your salary into the savings account, and spend at least $500 monthly on a credit or debit card, some savings accounts you can consider are:
- BOC Smart SAver (3.50% interest earned p.a.)
- UOB One (3.00% interest earned p.a.)
- OCBC 360 (2.65% interest earned p.a.)
- Citi Plus (1.90% interest earned p.a.)
- DBS Multiplier (1.80% interest earned p.a.)
- Standard Chartered Bonus$aver (1.63% interest earned p.a.)
Of course, you should run the numbers and consult each bank to understand the most updated terms and conditions of each savings account.
5. Top Up Your CPF OA
As a homeowner, you would know your CPF OA (Ordinary Account) savings can be used to pay your home’s down payment, stamp and legal fees, and to service your monthly housing loan repayments.
You can top up your CPF savings and accrue more interest. You should top up as early as possible to maximise the growth of your CPF savings through the power of compound interest. Additionally, you can earn more interest if you top up earlier in the year
If you are taking an HDB loan, you have the option of retaining up to $20,000 in your OA, with the rest going to your housing payment.
While you can retain any amount in your OA, even the CPF board recommends retaining at least $20,000 as a safety net and a way to earn risk-free interest.
6. Top Up Your Interest-Offset Mortgage Account
If your mortgage is under control, you could put your bonus into an interest offset mortgage account.
An interest-offset mortgage account matches the interest rate of your mortgage from a financial institution. It allows you to withdraw and deposit cash, like a typical savings account. The key difference is if you leave your offset account for a stipulated period of time, you could reduce the amount of interest charged to your mortgage.
The higher your balance and the longer your money sits in the offset mortgage account, the lesser interest you have to pay.
The interest rate on an offset mortgage varies by bank. Contact the lender for more information on how a mortgage offset account works.
Here are some accounts you can consider:
- HSBC SmartMortgage
- Standard Chartered MortgageOne
- Citibank Home Saver
Calculate Your Bonus Using the CPF Bonus Contribution Calculator
You can use a bonus calculator or a bonus estimator to calculate your bonus. The CPF bonus contribution calculator is a free online bonus calculator tool employers and employees can use. Use this bonus calculator to estimate the CPF contributions payable for a given year.
The CPF bonus contribution calculator allows you to calculate using rates applicable from January 2025, taking into account the increase in CPF Ordinary Wage ceiling as well as the increase in the CPF contribution rates for employees aged above 55 to 65.
For employers using CPF EZPay to submit and pay CPF contributions, you do not have to use this CPF bonus contribution calculator. That’s because, unlike this bonus estimator tool, the CPF EZPay auto-computes your employees’ CPF contributions. But if your employee’s total wage exceeds $102,000, use the Additional Wage (AW) ceiling calculator instead of this CPF bonus contribution calculator.
Have More Questions on Home Financing? Let us Help
Putting your year-end bonus towards managing your home loan can be a powerful step toward financial freedom. Having interest savings, paying off your home loan faster, and growing your net worth are just some benefits. Other financially savvy uses for your bonus include making home improvements or renovation projects to increase your property’s value.
Still unsure of how to use your bonus for your home financing needs? Let our friendly and knowledgeable Mortgage Experts help you. From calculating your potential savings from refinancing to choosing the best mortgage package for you, our Mortgage Experts can assist you in making informed decisions. And the best part? It’s all at no cost!
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