Buying a home might be the biggest financial commitment an average Singaporean will make in a lifetime. When looking for the best fixed-rate home loan to finance your purchase, every prospective homebuyer has to face this nagging question: should I choose a fixed-rate mortgage loan?
If you like the idea of fixing your interest rate on your mortgage but are not sure about what you are getting into, this article will provide you with some lesser-known facts about fixed rates in Singapore so you can make a well-informed home loan decision.
Here are 5 key points to take note of a fixed-rate home loan in Singapore:
Unlike what the name suggests, fixed home loans in Singapore are not fixed — at least not forever. The first thing you need to realise about housing loans is that all loan packages will eventually turn into floating rates.
The fixed home loans typically have static interest rates for the first two to five years (fixed-rate period), and afterwards, the interest rates will likely increase or revert to “floating”.
So if banks announce the lowering of interest rates after you have taken the home loan, due to the fixed nature of your interest rate, you will not qualify for the new lowered rates for your monthly repayment instalments.
Thus, you would end up paying more for no reason. To avoid this from happening, regard the fixed-rate period as a promotional period as the rates in this period are generally lower than the subsequent floating rate.
The closest you can get to fixed rates for a longer period is by constantly refinancing from one fixed rate package to another.
For those purchasing HDB properties, while the HDB loan interest rate is not technically a fixed rate, it has remained unchanged at 2.6% for many years (since 2003).
When it comes to choosing a home loan, the one factor that will impact your choice the most is your property type. Let’s take a look at the different financing options available in Singapore:
|Property type||Type of Bank Home Loan Rate|
|Private property (under construction)||Floating rate only|
|Private property (completed)||Fixed rate or Floating rate|
|HDB BTO (under construction)||Floating rate only|
|HDB flat (resale or completed BTO)||Fixed rate or Floating rate|
Banks often want to lock you into a home loan package for the duration of the construction. Since the duration for construction can stretch up to three to four years or even more, banks do not offer fixed interest rate packages for buildings under construction (BUC).
Therefore, whether HDB or private, if your property is still under construction, the only bank loan available to you would be a floating rate package that is either pegged to the SORA rate or a rate set by the bank.
Once the property is completed or built, you can then avail the full range of home loan options, including fixed-rate home loans.
If a horse befriends the grass, what would it eat? The same goes for your bank. Do not expect your loving bank to notify you before converting your fixed rate home loan into a floating one.
Banks love your money like ants love sugar, that is how they grow and make a profit. They will conveniently forget to tell you when your fixed-rate home loan expires and auto-convert it to a floating rate loan, which usually tends to skyrocket after the lock-in period ends.
However, if you partner with one of DollarBack Mortgage brokers, we would remind you when your fixed-rate loan is going to expire and also advise you on available refinancing options.
A common misconception in the minds of potential homeowners is that getting the lowest interest rates can help always them save more. While it makes sense on some level and undoubtedly, the interest rate is an important factor when it comes to choosing a home loan rate, it is surely not the only factor that one should take into consideration.
The interest rate on your home loan will also depend on the “spread” imposed by the bank. It is crucial to understand how interest rates will behave in the next two to five years (i.e. lock-in period) and how they will affect the overall loan cost.
The floating rates offered by the bank are usually structured like this: [reference rate] + [spread]. The reference rate refers to an interest rate type the bank selects (either SORA, Fixed Deposit or a Board rate) and the spread equates to a bank’s profit margin.
For example, a typical floating rate loan quote may look like this: 3M SORA + 0.5%, which means you pay whatever the interest rate is for the 3-month SORA (e.g. 1%) + 0.5% for a total of 1.5%.
Bank spread usually rises considerably after two to three years. Preferably, you want the spread to remain low for as long as possible.
The home loan spread is calculated by the difference between the lending interest rate a bank charges a borrower on loans and the borrowing interest rate it pays a depositor. In other words, it is a percentage that tells how much the bank earns vs how much it gives out.
For example, if a bank charges customers 4.5% interest for a home loan and pays out depositors at an interest rate of 1.5%, the bank spread will come out to be 3% (4.5% – 1.5%).
Let us dig deeper to understand how choosing the lowest interest rate might not be the best way to go every time with a comparison between two different fixed interest rate packages.
|2-Year Fixed-Rate Home Loan – Option 1|
|Year 3||3M SORA + 1.60%|
|2-Year Fixed-Rate Home Loan – Option 2|
|Year 3||3M SORA + 1.00%|
Since the 3M SORA rate for both options 1 & 2 would be the same, the key differentiating factor would be the home loan spread.
In year 3, assuming the 3M SORA rate comes to 0.20%, the total interest rate for Option 1 would be 1.80% vs 1.20% for Option 2.
As we go further into the future, the probability of interest rates increasing becomes much higher (because our rates are already at a historical low).
Taking into account that in an increasing interest-rate environment banks might not offer fixed-rate packages at all (yes, this is possible!) and all new floating-rate packages would come at a higher total interest rate, you would be better off choosing option 2 as it gives an average rate 1.17% over the next three years vs 1.33% for option 1.
This shows why looking at the lowest interest rate alone is insufficient and it is always better to look holistically to decide the best bank for a home loan that caters to your financial needs.
It makes more sense to choose fixed rates when there is a clear indication that interest rates are set to rise significantly over the next two to three years as they can shield you from increased mortgage costs. Only when you are expecting the floating rates to go higher than fixed rates, you will benefit from taking up fixed home loans.
Floating rates can be more economical in a declining interest-rate environment, as we know how floating rates kept low during the 2008 Financial Crisis and then again in the COVID-19 pandemic in 2020 and 2021.
Here is a snapshot view of which home loan package is suited depending on the interest-rate environment.
|Potential Savings||Decreasing Interest-Rate Environment||Increasing Interest-Rate Environment|
|Highest||SORA Rate||Fixed Rate|
|Moderate||Fixed Deposit Rate (FHR)||Fixed Deposit Rate (FHR)|
|Lowest||Fixed Rate||SORA or Board Rate|
Fixed-rate home loans are best suited for people who want to streamline their financial planning and budgeting, and do not want to deal with unexpected movements in their monthly cash flow.
A lot of people perceive floating rate loans with some stigma and concerns for their fluctuating nature in interest rates.
What they fail to realise is that these loans will also tend to charge lower interest rates than fixed-rate mortgages because of this volatility should the market rates go downwards. This means floating rates tend to be the more economical choice in a stable interest-rate environment.
Ultimately, you can always refinance or reprice your home loan after your lock-in period ends if your expectations on rate movements change and fixed rates seem more economical.
None of us has a fortune-telling crystal ball to gaze into to predict a future showing the exact trajectory of interest rates in the upcoming years. However, if you are looking to take up a fixed-rate mortgage loan, you must keep the following points in mind:
Fixed mortgage loans with lengthy lock-in periods generally have higher interest rates, which can make it more difficult for you to enjoy savings from refinancing down the line.
Therefore, in a rising interest-rate environment, you must look at how much more you are comfortable paying for a longer-term fixed rate.
For example, suppose a 3-year fixed-rate mortgage loan has a higher monthly repayment by $150 as compared to a 2-year fixed-rate. Would you be more comfortable paying $150 a month extra for the additional year of stability and peace of mind?
As fixed-rate packages assure you of fixed monthly repayments in the lock-in period, be ready to pay penalties if you would like to make a partial lump-sum repayment. Even selling your property during the lock-in period is subjected to penalties.
All these penalties might make fixed mortgage loans financially unviable. However, certain exceptional fixed-rate options offer such flexibility without attaching a high premium to your interest rates.
An interest offset account is particularly useful in an increasing interest-rate environment as it helps manage your interest expense while still maximising liquidity.
However, if you are interested in an interest offset account, please note that fixed rate packages do not offer such a feature, which is why you might then need to consider a floating rate option.
If you are looking to refinance and want to lock in a fixed rate with a different bank more than three months before your current lock-in period ends, here is something you need to know.
The fixed term for almost all banks typically starts three months after the date of your offer letter, which means you get a shorter fixed-term period within your lock-in period.
For example, let us say your current mortgage lock-in period ends in July 2021 but you want to lock in an attractive 3-year fixed rate option with Bank D in February 2021.
Now instead of having a fixed term of 36 months, you will only get a fixed rate of 34 months while your lock-in period remains at three years. This puts you at risk of servicing a floating interest rate while still serving your lock-in period with Bank D.
Therefore, it is always best to consult an unbiased party, like a professional mortgage broker, for guidance on which banks best fit your requirements in a situation like this.
It’s difficult to say that a fixed rate is always better than a floating rate, or vice versa. Whether to choose a fixed rate or floating rate requires you to understand how rates will behave in the next two to five years and how that impacts your overall cost. In the end, the rate you opt for should depend on your risk appetite and financial situation.
Some homeowners might prefer spending a premium for the convenience of financial planning and peace of mind while those who are financially savvy might prefer tracking fluctuations in interest rates and enjoy the potential savings offered by a floating rate in the long run.
Personal finance is an individualised matter, and absolutes like “always” and “never” rarely apply. That is why so many people consider speaking to mortgage consultants to get personalised advice on their home financing options.
At DollarBack Mortgage, we provide in-depth home loan advisory services that help you arrive at the best solution based on your financial situation. We work closely with you to gather information regarding the purpose of the property purchase, your income expectations, your current and expected debt obligations, and other relevant details to help determine the type of rate loan that will work best for your needs. Contact us today to learn more.
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