How to choose a home loan interest rate in Singapore?

Home loan interest rates in Singapore tend to fluctuate in tandem with global interest rates. The global recession caused by the COVID-19 pandemic kept interest rates near historically low levels for the past two years, making it easier for new homebuyers to secure low-interest home loans. But the tides are changing now.

As economies around the world, including Singapore’s economy, opened up and people started spending more, Singapore banks pushed up their interest rates, including mortgage rates.

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 explain help you understand more about the types of home loan interest rates offered in Singapore in more detail and the impact of the rising interest rate environment on your home loan.

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.

What are the different types of interest rates offered on home loans?

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.

Before taking a decision, ask yourself how high-interest rates will rise and if you are willing to forgo the additional amount for stability.

Types of home loan interest rates in Singapore

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:

• Fixed interest rate home loans
• Board Rate (BR) loans
• Singapore Overnight Rate Average (SORA) home loans
• Fixed deposit home rate (FDR/FHR) loan

Is there such a thing as a best home loan interest rate?

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 types of interest rates on home loans: fixed rate vs floating rate.

Fixed interest rates		Floating interest rates
Generally higher	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	Volatility	Subject to market fluctuations; volatile
For those with low-risk appetite	Risk appetite	For those with a higher risk appetite
Want certainty in a volatile interest rate environment; keep mortgage repayments constant	Ideal for	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.

1. Fixed interest rate home loans

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. After the fixed rate period ends, the interest rates will revert to floating rates.

Advantages of a fixed rate loan

• Fixed rates can shield you from higher mortgage costs in an increasing interest-rate environment (like right now!) as you can lock in a lower rate beforehand.
• Limited exposure to volatile interest rates makes it easier for homeowners to budget their finances and manage their cash flow.
• Protects from sudden changes in mortgage rates during the lock-in period.

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.

Disadvantages of a fixed rate loan

• A fixed rates home loan is “fixed” only for the first two or three years after which it automatically converts into a floating rate.
• Bank’s fixed rate home loan packages are often pegged at a higher interest rate than other home loan packages, which means a higher monthly repayment.
• You can’t apply for a fixed-rate mortgage if your property (such as a condo launch or BTO) is still under construction.

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 of a board rate loan

• If you don’t want to continue with the revised board rates, the bank lets you switch to another price package without a penalty. It works well in a rising interest rate environment.
• You get the flexibility to prepay up to 50% of the outstanding loan during the lock-in period without any penalty fee.
• Taking about volatility, board rates do not change or fluctuate as frequently as floating interest rates like SIBOR or SORA.

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 of a board rate loan

• The board rate lacks no transparency. No one except a few upper management officials knows how it is determined and what benchmarks are used to decide this rate.
• Board rates can be revised by the bank as per their convenience (sometimes every quarter) without requiring them to explain or justify any increase in interest rates to the customers.
• A 30-day notice before revising the interest board rate may not work well for those trying to plan their finances ahead of time.

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.

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 Overnight Rate Average (SORA) home loans

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.

Advantages of a SORA rate loan

• SORA has been published daily by MAS since July 2005, so it means there is long historical data for potential homeowners to use and analyse for asset-liability pricing, risk management, etc.
• SORA is based on interbank transactions that have already taken place, making it more predictable when compared to SOR and SIBOR. If you keep a tab on daily interest rates in Singapore, you might be able to predict SORA rates in advance.
• Since SORA rates are backward-looking overnight rates, they have higher resilience to market fragmentation, aiding pricing transparency and improved assessment of loans.

Disadvantages of a SORA rate loan

• Although SORA is less volatile and risky than SIBOR (based on forward-looking future transactions), this doesn’t make SORA a risk-free rate.
• 1-month SORA is more volatile than 3-month or 6-month SORA rates – so be prepared for monthly fluctuations in your repayments.
• SORA home loans are relatively new, so homebuyers may have lesser options right now.

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

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).

Advantages of a FHR / FDR loan

• Banks are less inclined to increase their fixed deposit rates as it not only compels them to increase their fixed deposit interest rates but also draws the scrutiny of MAS.
• Relatively more transparent than board rates as the interest rates are openly advertised on the bank’s website and other digital channels.
• FDR loans are relatively less volatile than SIBOR loans. Even if the banks raise their fixed deposit interest rates, they tend to rise slowly and with an interest rate cap.

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 of a FHR / FDR loan

• Just like board rates, FDR can be adjusted at the bank’s discretion at any time, leaving you at the mercy of your bank.
• Borrowers can’t take advantage of a plunging interest rate environment as FDR rates do not move drastically in a short period.
• FDR loans lack transparency. By no means can you ever find out if the bank’s quoted FDR rate is really what it is supposed to be. A lot of information regarding how fixed deposit interest rates are calculated is kept internally and not publicly shared.

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.

Can I negotiate my home loan interest rate?

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.

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!