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MANY home owners are so fed up with being slugged by continual mortgage rate hikes that they are using excess Central Provident Fund (CPF) money and even hard cash to reduce their bank loans.

Some borrowers are redirecting money sitting idle in their CPF Ordinary Accounts (OA), while others are digging into savings or tapping into their bumper bonuses from last year.

Citibank revealed that the number of its customers using cash to pay down more of their loans has doubled in the first quarter of this year from the same period last year.

It said customers would typically plonk down an amount about six times their monthly instalments, which can dramatically reduce the interest bill over the course of the loan.

The bank said the strengthening economy and the extra bonus payments it generated are behind the practice.

Other banks refused to divulge details, but acknowledged that they were seeing more borrowers digging deep.

OCBC Bank said the improved economy and recent rate increases meant it was 'only natural for more people to make partial repayments... as soon as they are able to'.

The higher-interest rate environment - there has been about five rate hikes in the past 18 months - means that paying down home loans now makes sound financial sense.

Providend chief executive Christopher Tan said: 'If you are not investing your money and it's just there in the OA, you might as well pay off your loan and make a gain on the interest rate differential.'

The differential refers to the gap between a bank's home loan rate and the CPF's interest rate.

It is marginal for those who borrowed from the Housing Board at a concessionary rate of 2.6 per cent a year. This is just a notch up from the annual 2.5 per cent they get on CPF funds in their OAs.

But the gap is much more marked for those who took bank loans either because they own private properties or do not qualify for an HDB loan.

The hikes last year saw rates go up by between 0.75 and 1.5 percentage points. A further rise this year bumped them up by an average of 0.5 percentage point and there is likely to be more coming.

For standard fixed and variable home loan packages, borrowers are now paying in excess of 3 per cent in the first year of their loans and possibly 4 per cent or more if they are further into the mortgage duration.

It makes no sense to leave money earning 2.5 per cent in one account, while you are forking out 4 per cent or more on a home loan from another.

Far better, say the experts, to pay down the loan as it immediately reduces the outstanding amount owed. And while refinancing with another bank might cut the rate initially, this applies to a larger loan, which can still be subject to future rate hikes.

For those Citibank clients who pay a lump sum of about six times their monthly instalments, the savings can be significant. Assuming a 30-year loan of $500,000 at 3.5 per cent, this will save them about $7,500 in interest over the life of the loan.

DBS Bank, which experienced a 2 per cent quarter-on-quarter fall in home loans volume in the first three months of the year, said repayments are usually in excess of $10,000.

Home owners, however, have to weigh interest savings against penalties that banks may levy for early repayment. But penalties, if any, tend to be smaller in comparison.

Maybank, for instance, said penalties do not apply to its variable rate packages. Borrowers on its fixed rate package with a three-year lock-in period can also still prepay up to 20 per cent of the original loan amount without a penalty.

With mortgage rates expected to go up more this year, wealth management firm dollarDEX is expecting more home owners to opt for early repayment, if they have the means.

'Many Singaporeans are asset rich, but cash poor. Some however, may sell off second homes to pay down the mortgage on the first,' it said.

But the banks are not concerned even though the trend could mean a hit to their recurring interest income - a core source of earnings.

Some have pointed to home loan products they devised that were designed to help borrowers pay off their loans faster and more cheaply.

Standard Chartered, for example, cited its recently launched FamilyLink loan which allows owners to peg their mortgages to deposit accounts belonging to family members. These accounts earn extra interest that can go towards reducing the loan.

kelvwong@sph.com.sg