How to choose a home loan interest rate in Singapore?

Unlike a conventional loan, you should never choose a home loan package in Singapore based on the interest rate alone. Banks are always innovating to differentiate their home loan interest rates, and many contain pros and cons that are not obvious. Here’s how to choose between them.

The four most common types of home loan interest rates in Singapore you’ll find on the market are:

• Fixed rate home loans
• Internal Board Rate (IBR) or Board Rate (BR) loans
• Singapore Interbank Offered Rate (SIBOR) loans
• Fixed Deposit Home Rate (FHR) loan (actually a type of Board Rate loan)

For each of these home loan interest rate types, we have included key tips to take note of when deciding which one to choose.

1. Fixed interest rate home loans

Advantages

A fixed rate mortgage loan makes it easier to plan financially. You always know exactly what you’ll pay each month for as long as the fixed rate period lasts.

Fixed rate loans are popular because interest rates are on the rise. For example, the typical interest rate now is two per cent per annum, but it was as low as 0.9 per cent back in 2009. By using a fixed rate loan, you can lock in a good rate.

Disadvantages

A fixed rate loan is always “locked-in” during the fixed rate period. If you try to refinance—switching to a cheaper loan package—during the fixed rate period, you will incur a steep penalty. This is usually 1.5 per cent of the outstanding loan amount. Needless to say, it is never worth paying the lock-in penalty.

Fixed rate loans also tend to be more expensive compared to other mortgage loans in Singapore, especially when you factor in the floating rates that the loan will revert to at the end of the fixed rate period. This could ultimately be more expensive than other loans available at the time.

Also, you may occasionally hear that you can have a “semi-fixed” loan. This usually refers to the process of refinancing from one fixed loan into another, when the fixed rate period expires. A home loans specialist can do this for you.

Choosing a fixed rate home loan

Try to find a fixed interest rate period of two years, no more than that. This is because you cannot refinance without a penalty during the fixed rate period. Should interest rates start to go down, you’ll be forced to stay with your higher fixed rate.

Also, take note of what happens to the interest rate after the fixed rate period. It might suddenly jump, even if it seemed like a good deal earlier on. Try to avoid having packages pegged to a bank’s board rate (see Tip 2) after the fixed rate period ends.

Where possible, try to find a fixed rate loan that becomes a fixed deposit home rate loan after the fixed rate period ends. Such loans are the slowest to raise rates, even in an environment of rising interest rates.

A fixed rate home loan maintains a constant interest rate for a given time period—usually three to five years. This means that, for the duration of the fixed rate period, your home loan interest rate will remain the same, regardless of what happens in the wider economy.

Keep in mind, though, that there is no such thing as a perpetual fixed rate loan in Singapore; even the banks which have the cheapest fixed rate home loans revert to variable rates at the end of the fixed rate period.

2. Internal Board Rate or Board Rate (BR) loans

IBR or BR loans have an interest rate that is set by the bank. Most of the time, banks will try to be competitive. They will keep the rates close to—or even below—what is available on the market.

Advantages

Some banks have not changed their interest rates for a long time, despite the rising interest rate environment. Sometimes, as part of a promotion to gain market share, you can find board rates that are much cheaper than what’s available on the market.

Disadvantages

Unlike the SIBOR rate (see below), the interest rate movements of IBRs or BRs are not very transparent. They are also unilaterally controlled by the bank, which can raise the rates at any time.

BR loans are a matter of trust—it comes down to how much you trust your bank not to hike rates, and to give you a fair deal. Also, when the bank tells you certain details, such as how low or constant the rate has been, you mostly have to take their word for it. There are few publicly available sources for you to check.

It is best to consult a home loan specialist before taking up this kind of loan. These specialists work with multiple banks, so they can advise you on the overall history of the bank’s BR loans.

Choosing a board rate home loan

In general, BR loans should be the last you consider taking. Banks, like all businesses, are driven by profit margins. These profit margins are tied to the interest earned from home loan interest rates.

When you choose to accept the bank’s rate, they are free to raise the home loan interest rates as a “business decision” at any time—at your expense, of course. Remember that banks are more beholden to their shareholders than they are to you.

3. Singapore Interbank Offered Rate (SIBOR) home loans

SIBOR is the median rate at which local banks are lending to each other. It is monitored and regulated by the Monetary Authority of Singapore (MAS).

Mortgage loans in Singapore typically use the three-month or one-month SIBOR rate. With a one-month SIBOR rate, your home loan will be revised to match SIBOR every month. With a three-month SIBOR rate, your home loan will be revised to match SIBOR every three months.

In other words, your monthly loan repayment amount will change either monthly or quarterly, based on which type of SIBOR loan you pick.

You may also find six-month or nine-month SIBOR loans, but these are rare. A very long SIBOR interest rate period, such as a 12-month SIBOR, is effectively considered a one-year fixed rate (see point 1), because your rate won’t change during that time.

A SIBOR loan will consist of the bank’s spread (how much the bank is charging) plus the SIBOR rate for the period. For example:

3M SIBOR + 0.7%

This would mean your home loan interest rate is the three-month SIBOR rate, plus 0.7 per cent. So if the three-month SIBOR rate is 1.8 per cent at the time, your interest rate would be 2.5 per cent.

Advantages

The SIBOR rate is transparent and not controlled by any single bank. They might also save you money, as they go down more quickly than many other home loan interest rates when interest rates decrease.

Disadvantages

The flip side is that, when interest rates increase, SIBOR rates increase faster than many other loan types too.

As the SIBOR fluctuates, it can be hard to keep track of how much you’re really paying. This is especially the case if you pay your home loan through your CPF account and don’t keep track over the years.

SIBOR is also set to be completely discontinued by 2024 and will be replaced with a SORA interest rate.

Choosing a SIBOR home loan

As the SIBOR is the same for every bank, the only part of the interest rate they can control is the bank’s spread. That means it’s important to find the bank with the lowest spread when comparing SIBOR loan packages.

If interest rates are currently rising, pick the 3M SIBOR rate. This is the loan repayment that will only change every quarter, giving you time to weather any large increases.

On the other hand, if rates are falling, pick the 1M SIBOR rate—this ensures that your interest rate falls faster (and is not stuck with the higher rate from last quarter!).

4. Fixed deposit interest rate (FDR / FHR) home loans

Fixed Deposit Home Rate (FHR) loans are tied to the bank’s fixed deposit rates.

To be technical, an FHR loan is a type of BR loan (see point 2). This type of loan was first invented by DBS. They understood the fears of borrowers—that a BR loan could be controlled by the bank and raised or lowered anytime.

To reassure borrowers, DBS came up with the idea of pegging the home loan to its fixed deposit rates. This means that, if DBS wants to raise the interest rates on home loans, they will also have to raise the interest rate on fixed deposits. This disincentivises them from suddenly spiking interest rates.

The interest rate on an FHR loan consists of the bank’s spread plus the average fixed deposit rate over a given time period (often nine-month or eight-month fixed deposit rates).

Advantages

The interest rate on FHR loans tends to rise more slowly compared to other loan types (except fixed rates, but FHR loans are also often cheaper than fixed rates).

When getting an FHR loan, property buyers feel more reassurance compared to other BR loans, as the bank is theoretically restrained from imposing high rates.

Disadvantages

FHR loans are not fully insulated from rising interest rates like fixed rates are. If interest rates as a whole are rising, FHR loan rates will still rise in tandem, albeit at a slower pace than SIBOR.

FHR rates are ultimately still controlled by the bank. Those who distrust banks will not be assured by pegging rates to fixed deposits. They will argue that the bank still makes more from raising home loan rates than the amount they have to pay out in fixed deposits.

Choosing a FDR / FHR home loan

FHR loan packages have different tenures attached to them—for example, periods of 8, 9, or 12 months, and so on. It’s often a good idea to find a package with the longest tenure (48 months has been the longest seen so far).

FHR loans with longer tenures tend to change less often. For shorter tenures, your home loan interest rate tends to increase faster.

Consider your situation when choosing which interest rate type is the best for your home loan

It’s not simply about which home loan rates are lowest, it’s also about picking the loan that fits your specific needs and then knowing how to negotiate with the bank for a lower mortgage rate which is crucial.

For example, if you are self-employed and have a variable income, you may not want a one-month SIBOR rate to add to the instability. It may not matter that the loan has the smallest spread, or that it’s cheaper at the time.

If you plan to rent out the property you’re buying, and an expensive fixed rate would swallow the entirety of your rental income, then it may not be right for you; even if it seems more stable.

Consult a DollarBack Mortgage Professional to determine which loan package currently suits your needs and long-term plans. Our mortgage professionals can warn you of less obvious dangers, such as a bank that’s fond of spiking its board rates, or a fixed rate that’s way too expensive to justify.

DollarBack Mortgage is an independent mortgage broker in Singapore with partnerships with all major banks. Get the best home loan and enjoy cash rewards!