In 2024, choosing the right home loan interest rate in Singapore is a critical decision for prospective homeowners. This choice not only impacts their monthly repayments but also affects long-term financial commitments and overall cost-effectiveness of the loan.
According to our research, about 80% of our customers’ home loan shopping decisions are dependent on the offered interest rate, which is quite logical because interest rates account for the majority of a home loan’s cost. But how do you choose the type of interest rate for your home loan package?
This guide will help you understand the nuances of different home loan interest rate types offered in Singapore and how anticipated interest rate cuts in 2024 might affect your home loan. We will evaluate risk factors, and provide insights to help you make an informed decision that aligns with market trends and your personal financial goals.
Tip: It is not just about interest rates. Home loans can also be compared based on their flexibility in terms of allowing you to refinance at your convenience.
If you have decided to go with a bank loan, like every borrower, you will have to face this nagging question: should I choose a floating rate or a fixed rate? Well, the decision to choose either a fixed or floating rate home loan package depends on your risk appetite since both types of interest rates have pros and cons.
Not all mortgage rates are created equal. Some may fluctuate more during changing market conditions, while others tend to be relatively stable.
Here are the most common types of interest rates you can choose from when shopping for a home loan in Singapore:
The best home loan interest rate is a personal choice. Your decision should depend on your judgement of how the market will trend. If you are confident that interest rates will rise significantly in upcoming years, it is better to go with fixed interest rates to secure low-interest rates now.
Also, the fixed interest rate package is suitable for those who are risk-averse and willing to pay a premium for stability. On the other hand, if you believe that interest rates will go down in the next few years, you should choose floating rates. If you are financially savvy and ready to take a little more risk to enjoy more savings, you can choose floating interest rates.
There is no better loan per se, but depending on your risk appetite and loan tenure, one or the other might work out better for you.
Let’s take a look at the comparison table of two most popular types of interest rates on home loans: fixed rate vs floating rate.
|Fixed interest rates
|Floating interest rates
|Generally lower (but spread applies after promotional rate)
|No, remain unchanged for a set period
|Pegged to market?
|Yes for SORA
No for fixed deposit and board rates
|Fixed; not volatile
|Subject to market fluctuations; volatile
|For those with low-risk appetite
|For those with a higher risk appetite
|Want certainty in a volatile interest rate environment; keep mortgage repayments constant
|Want to take advantage of a falling interest rate environment; can budget finances with changing rates
Let’s take a quick look at the various benefits and drawbacks of each of these home-loan interest rate types to decide what is most suitable for you.
When you opt for a fixed interest rate for a home loan, your bank assures you that your home loan interest rates will not change for a specific time, irrespective of the market conditions and the wider economy. However, once the fixed-rate period ends, borrowers may benefit from lower floating rates if they refinance or reprice their loan, assuming the Fed will cut interest rates in 2024.
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.
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.
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.
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.
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.
Unlike the SORA 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.
Mortgage board rate 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.
While board rates are typically influenced by broader market interest rates, the exact impact of a rate cut on BR loans depends on the individual bank’s policies and decisions. If banks decide to pass on the benefits of the rate cut in 2024, borrowers could see lower interest rates on their loans.
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.
SORA is based on the volume-rated average rate of all overnight recorded interbank transactions in the unsecured SGD cash market. It measures the aggregate of all banking rates, top and bottom percentiles included.
SORA takes the interbank transactions of the past 90 days into account, allowing you to better plan your investments and savings.
A cut in federal funds rate in 2024 would likely cause SORA to decrease. Consequently, borrowers with SORA-pegged loans would benefit from lower interest payments, as their loan rates would adjust in accordance with the lower SORA.
A fixed deposit (FHR) home loan pegs your interest rate to the fixed deposit rates designated by the bank. It means your home loan interest rates will change every time your bank revises its 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).
If the bank lowers its fixed deposit rates in 2024 in response to the broader interest rate cut, then the FDR/FHR would decrease, leading to lower interest costs for borrowers. However, this also depends on the bank’s decision to adjust its fixed deposit rates in response to the changing interest rate environment.
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.
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.
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.
Of course. You can and should negotiate home loan interest rates when getting a home loan. Whether you are a first-time homebuyer or a homeowner looking to refinance your current home loan package, negotiating to get a better deal is always a smart move. Not negotiating mortgage rates means you are leaving money on the table!
So once you decide on the home loan interest rate type you want, it is time to convince the lender bank to lower your interest rate. Sadly, interest rate comparison websites do not work as effectively in this case.
Why? It is because most banks do not advertise their best interest rates openly.
A qualified mortgage consultant/specialist can help you out. Since such professionals have a closer relationship with your local banks, they may have better access to information that is not usually revealed to the general public.
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 SORA 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.
It’s important to note that each bank may respond differently to changes in the interest rate environment, and other factors like economic conditions, monetary policy, and market competition can also influence how these interest rate cuts are passed on to consumers. Borrowers should keep an eye on announcements from their banks.
DollarBack Mortgage is an independent mortgage broker in Singapore with partnerships with all major banks. Get the best home loan in Singapore across all major banks and compare mortgage rates with the highest rewards.
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