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How Is Mortgage Interest Calculated In Singapore 2024 & Trends?

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Mortgage interest calculation in Singapore is a critical topic for homeowners and prospective buyers. Understanding this not only helps in estimating monthly repayments but also in making informed decisions about property investments.

This article will delve into the methods of mortgage interest calculation in Singapore as of 2024, followed by an overview of historical trends that have shaped the current landscape.

We’ll also look into how the US Fed interest rate hikes affected mortgage rates in Singapore and what you can expect in 2024 and beyond. You will also get expert advice on whether you should buy or refinance a property in Singapore in 2024.

With all the guidance and tips from industry experts at DollarBack Mortgage, you will be able to make smart, informed decisions while availing of a home loan in Singapore. So, let’s get started.

Contents:

HOW IS MORTGAGE INTEREST CALCULATED?

Since the ‘incredibly popular’ interest-only loans were banned in September 2009, loan amortisation is the only mode of home loan repayment in Singapore.

Mortgage interest is calculated based on the principle of amortisation. When explaining the terms & conditions of a home loan to borrowers, Singaporean banks tend to provide an amortisation schedule (usually in a table format) to explain how monthly repayments are structured over the loan tenure.

Every mortgage repayment is divided into two components: one part reduces the principal, which is the original amount borrowed, and the other part covers the interest, which is the charge for borrowing the money. Initially, a larger portion of the repayment goes towards interest component, but over time, this shifts towards the principal repayment.

In other words, the interest payment comprises the greater portion of the monthly repayment at the start of the loan repayment period and gradually decreases over time. This allows homeowners to easily manage their home mortgage loan on a month-by-month basis.

Although an amortisation schedule is a forecast, it still gives a good idea about how much interest and principal would have been repaid at any point in future if the borrower keeps up with monthly payments.

Here’s an example of how a mortgage of $700,000 on a 30-year tenure with a fixed 4% interest rate amortised:

MonthMonthly InstalmentInterest PaymentPrincipal PaymentInterest/Monthly instalment (%)Remaining Balance
1$3,341.91$2333.33$1,008.5769.80$698,991.43
2$3,341.91$2,329.97$1,011.9469.70$697,979.49
3$3,341.91$2,326.60$1,015.3169.60$696,964.18
358$3,341.91$33.20$3,308.711.70$6,650.54
359$3,341.91$22.17$3,319.740.70$3,330.80
360$3,341.91$11.10$3,330.800.30$0.00
  • Monthly instalment is fixed throughout assuming your interest rate is unchanged
  • Percentage of interest payment from your monthly instalment is at its highest during the initial months and reduces gradually as your mortgage is paid down

Mortgage interest rates are calculated via an amortization principle or a reducing balance method wherein your monthly repayments are broken down into small, consistent chunks spread across the loan tenure, allowing you to repay both your interest payment and principal repayment at the same time.

The amount going towards interest declines and principal payment increases as the term of your loan progresses. This helps loan borrowers to pay off their loans early and decrease their total cost of interest.

If you find it hard to understand amortisation loan calculation, you can speak to one of our home loan specialists for help calculating your monthly repayments and get acquainted with the amortisation schedule for your home loan.

WHAT ARE THE FACTORS THAT AFFECT MORTGAGE RATES?

Mortgage interest rates can fluctuate by several percentage points depending on the factors mentioned below. The difference can mean a significant drop or rise in your monthly repayment amount, which can later translate into tens of thousands of dollars in the total interest paid over the loan tenure.

If you also hope to get the best possible mortgage rates and improve your chances of obtaining the most favourable housing loan interest rates in Singapore, you must be aware of the various factors that a bank takes into consideration in order to determine whether you qualify for a mortgage and also what interest rate you will pay.

Some of the most important factors that affect mortgage rates are:

Credit Score

A bank predicts your reliability and creditworthiness through your credit score, which is calculated based on your financial history, including credit card payments, previous loans, late payments, and history of inquiries. A higher credit score can attract lower interest rates in mortgage loans.

Get your credit report from the Credit Bureau of Singapore, check for any discrepancies and dispute them (if required) before applying for a mortgage.

Property price and loan amount

The price of your home will impact your loan size, which in turn affects the interest rate offered. If the loan amount is particularly small, you might have to pay a higher interest rate. Generally, banks are willing to offer lower interest rates on larger mortgage loans (owing to healthier net interest margins).

Loan Tenure

When choosing a loan, one important factor to consider is the length of time you’ll take to pay it back. Generally, the faster you plan to repay the loan, the lower the interest rates you might be offered.

If you opt for a mortgage with a shorter repayment period, you usually get a lower interest rate. This is because paying back the loan quickly reduces the risk for the bank. When you pay off the principal (the original loan amount) rapidly, there’s less chance of default, meaning the bank is more likely to get all its money back.

It’s crucial to find a balance between a loan tenure that results in manageable monthly repayments and one that doesn’t extend too long, potentially raising the interest rate. Longer loan terms, while lowering your monthly payment, typically mean you’ll end up paying more in interest over the life of the loan.

Interest Rate Type

There are two common types of mortgage rates: fixed rate and floating rate. Fixed-rate mortgages lock in an interest rate for a specific period (typically 1-5 years). The advantage is the predictability of monthly repayments, which remains constant during the fixed-rate period. Floating-rate mortgages are tied to a reference rate, such as the Singapore Overnight Rate Average (SORA).

The interest rate varies as the reference rate changes, making monthly repayments fluctuate. The type of home loan interest rate you choose for your loan might impact your current and future financial state.

In addition to the factors mentioned above, do note that your Total Debt Servicing Ratio (TDSR) is also crucial for a mortgage application.

Macro-economic Factors

Some of the macro-economic factors that play a significant role in influencing mortgage rates and overall lending conditions include:

Inflation: Higher inflation often leads to higher interest rates, as lenders need to ensure that the returns on their loans keep pace with the rising cost of living. Conversely, low inflation can lead to lower interest rates.

In 2023, Singapore’s overall inflation rate is anticipated to average around 5%, with the core inflation rate, which excludes certain volatile and non-recurring items, expected to be around 4%. Looking ahead to 2024, it’s projected that the overall inflation rate in Singapore will likely average between 3% and 4%. Meanwhile, the core inflation rate for the same year is forecasted to be between 2.5% and 3.5%.

Economic Growth: The overall health of the economy, measured by indicators like GDP growth, employment rates, and consumer spending, influences mortgage rates. Strong economic growth can lead to higher interest rates as demand for credit increases, and conversely, in slower economies, interest rates might be lowered to stimulate borrowing and investment.

According to the Monetary Authority of Singapore (MAS), Singapore’s economic growth is projected to improve in the second half of 2024.

US Fed’s Monetary Policy: The US Fed sets monetary policy for the United States, which can have a global impact. When the Fed raises or lowers its key interest rates, it can affect interest rates worldwide, including Singapore. This is due to the interconnectedness of global financial markets and the dominant role of the US economy.

If the Fed opts for rate cuts, as anticipated, this could lead to lower mortgage rates globally, including in Singapore. Lower US rates typically result in reduced borrowing costs worldwide. This could make mortgages more affordable in Singapore, impacting both new homebuyers and existing homeowners looking to refinance.

However, the extent of this impact depends on various factors including global economic conditions and local financial policies.

Bond Market: The bond market, particularly government bond yields, often influences mortgage rates. For instance, mortgage rates can move in tandem with the yield on 10-year Treasury notes in the U.S. If bond yields rise, mortgage rates typically follow suit, as lenders adjust to the higher yield environment to maintain profitability. Conversely, if bond yields fall, this can lead to lower mortgage rates.

Public and Private Housing Market Conditions: The state of the housing market, both public (like HDB flats in Singapore) and private (like condominiums and landed properties), affects mortgage rates. High demand in the housing market can lead to higher interest rates, as lenders capitalize on the increased demand for mortgages.

Conversely, when something goes wrong in the economy, lenders might lower rates to attract more borrowers.

However, rate cuts by the Fed in 2024 may not necessarily be indicative of negative economic conditions, such as an impending recession. Instead, these cuts could signal that inflation is aligning more closely with the central bank’s target of 2%.

In such a scenario, the Fed’s decision to lower rates would be a response to achieving a more controlled inflationary environment, rather than a reaction to economic distress.

ARE MORTGAGE RATES CYCLICAL?

Bank mortgage interest rates fall during turbulent times and are highly cyclical. It is especially true for consumer banking that is all about taking in deposits and lending money.

Let’s take an example. Since banks tend to make a profit by lending money to borrowers, lower interest rates would mean falling profits for banks. For instance, if a bank offers an average of 3% housing loan interest rate, it is making more profits than what it would have made if the average interest rate was 1%, considering all other factors being equal.

In 2024, with anticipated rate cuts, the cyclical nature of mortgage rates remains relevant. Historically, mortgage rates tend to decrease during economic downturns as central banks reduce rates to stimulate growth.

With the US Fed expected to cut rates, mortgage rates may follow a similar downward trend. However, the impact on banks’ profitability and lending practices needs consideration. Lower rates might mean lesser profit margins for banks but could also stimulate more borrowing.

The dependency of mortgage rates on several factors (as discussed above) as well as their cyclical nature reinforce the fact that one can’t decide on making a long-term commitment (20 to 30 years) of buying a property just considering the current interest rates. Homebuyers have to take note of how the interest rates are expected to change in future.

Therefore, homebuyers should consider not just current rates but also future trends. Understanding past rate cycles can provide insights into potential future movements in the mortgage market.

Historical Trends in Housing Loan Interest Rates In Singapore

Impact of global financial crisis (2008 to 2014)

The 2008 financial crisis, a severe global economic downturn since the 1930s Great Depression, began in the U.S. with the collapse of mortgage-related financial products. Originating from risky subprime loans to low-income American households, the crisis escalated when these loans defaulted en masse due to soaring interest rates.

The resulting devaluation of related securities led to widespread distrust in financial markets, triggering a global financial paralysis. Significantly impacting foreign banks, including those in Singapore, the crisis reverberated through international financial systems.

Previously enjoying an 8% growth rate (2004-2007), Singapore, heavily reliant on exports to the U.S. and Europe, was the first East Asian nation profoundly affected by the downturn.

The U.S. banking crisis revealed the vulnerability of Singapore’s mortgage industry and economy to global shocks, leading to its worst slump, with mortgage rates taking about six years to begin recovery.

Economic recovery (2014 – 2019)

From 2014 onwards, housing loan interest rates in Singapore started to gradually increase by an average of 0.20% annually up to 2016. From 2016 onwards, mortgage rates started to rise quite aggressively with major banks in Singapore revising their home loan interest rates more frequently.

In 2018, mortgage rates in Singapore broke the 2% benchmark and continued on that upwards trajectory until fixed rates were hovering at about 2.68% in 2019 and then experienced a slight decrease just before COVID hit.

The rates were typically pegged to the Singapore Interbank Offered Rate (SIBOR) or the Swap Offer Rate (SOR).

2020 crisis: COVID-19 pandemic

Nearly 12 years after the Global Financial Crisis, the global mortgage market was hit in full force by an unexpected crisis in 2020, the Covid-19 pandemic. While mortgage rates were actually on the rise prior to 2020, the economic fallout caused by the pandemic pushed them back down to near-zero levels.

The COVID-19 pandemic had a considerable impact on the global economy, and the Singapore mortgage industry was no exception. In 2020, the economy of Singapore shrank 5.4% due to the pandemic.

From unprecedented spikes in mortgage delinquencies, significant job losses, a freeze of investor appetite, and income uncertainty for homeowners and homebuyers, the mortgage market experienced turmoil due to the COVID-19 pandemic.

During the pandemic, the Fed had slashed interest rates to near-zero levels, aiming to stimulate economic activity by making borrowing cheaper. This was part of a broader strategy to cushion the economic impact of the pandemic, which included extensive financial aid and emergency measures.

But there’s a silver lining. This made home loans an even more stunning bargain for property investors and home buyers as lower mortgage rates translate into lower monthly repayments and higher returns.

Post-pandemic Shifts: 2022 onwards

As the economy started showing signs of recovery, concerns about inflation began to surface. The combination of pent-up consumer demand, supply chain disruptions, and continued fiscal stimulus led to a rapid increase in prices, marking a shift from the deflationary risks that dominated during the height of the pandemic.

In response, the US Fed embarked on a trajectory of increasing interest rates, a significant shift from the low-rate environment maintained during the COVID-19 crisis. This move was intended to temper inflation by making borrowing more expensive, thereby slowing down consumer spending and business investments.

Since most banks in Singapore offered SIBOR-based home loan packages then, it was the most widely used benchmark for home loan packages in Singapore. With hikes in the US federal funds rates, SIBOR had dropped from a high of 1.9% in July 2019 to 0.25% in June 2020 (1-month SIBOR rate).

Singapore’s long-term interest rate, reported by the MAS, also dropped from 1.8% in 2019 to 0.8% in 2020.

Post-2020, there was a significant shift towards the SORA as the main benchmark rate, following global trends of moving away from interbank offered rates to transaction-based benchmarks. This was in response to the global financial community’s call for more transparent and reliable interest rate benchmarks.

WHAT WILL MORTGAGE RATES IN SINGAPORE BE LIKE IN 2024 AND BEYOND?

Looking ahead to 2024 and beyond, the trend of mortgage rates in Singapore is likely to be shaped by various factors, including shifts in the global economy and the monetary policies of the US Federal Reserve.

If the Fed proceeds with expected rate reductions, Singapore could see a similar downward trend in mortgage rates, potentially creating more favourable conditions for borrowers and energizing the property market.

Marking a shift from its series of rate hikes that started in March 2022, the Federal Open Market Committee (FOMC) projects three rate cuts of 25 basis points each in 2024. With the Federal Funds rate currently at a 22-year high of 5.25%-5.50%, it’s forecasted to decrease to 4.6% in 2024, then to 3.6% in 2025, and further to 2.9% in 2026, according to Fed projections.

These forecasts, however, are contingent on various economic indicators, such as high inflation rates and the overall stability of the global financial market. It’s crucial for homebuyers and investors to keep abreast of these developments and take the larger economic landscape into account when making property investment decisions.

While a reduction in mortgage rates is generally expected, the precise timing is still uncertain. Predictions among industry experts vary, with some anticipating rate cuts could start as soon as March, while others foresee them occurring in the third quarter of 2024 or later.

Estimates on the extent of these rate cuts range from no change at all to a significant reduction of up to 2.75 percentage points. The US Fed’s decisions, particularly in response to a possible recession, are expected to heavily influence Singapore’s interest rates, including those linked to SORA.

Homeowners and prospective buyers should note that while rental rates are expected to rise, the pace is likely to be slower than in 2023, with an anticipated increase of 5% to 8%. The completion of new housing developments might alleviate some of the pressure from the current supply-demand imbalance in the housing market.

Given the continuing volatility in the global financial markets, caution is advised for both existing and potential homeowners in Singapore. Consulting with a mortgage specialist is recommended to navigate these variable conditions and to secure the most favourable home loan rates available in Singapore.

Is 2024 a good time to buy property in Singapore?

Heading into 2024, the property market’s cyclical nature suggests a promising window for first-time purchasers, especially those considering an HDB flat, whether a Built-To-Order (BTO) or a resale unit. Though cautious optimism is advised, this period could be advantageous.

For 2024, the growth in resale prices is expected to stabilize, with an estimated moderate increase of about 3% to 5%. This is a deceleration compared to the 4.8% rise in 2023, and more notably, the 10.4% in 2022 and 12.7% in 2021.

This slowing trend in price growth is positive news for those looking to buy a resale flat. However, it’s important to note that the availability of these resale flats might also diminish during the year.

The availability of resale flats in Singapore reaching their five-year Minimum Occupation Period (MOP) is decreasing. After peaking at 30,920 units in 2022, the number fell to 15,549 in 2023 and is projected to drop further to 11,952 in 2024, leading to a reduced number of units entering the resale market.

On the other hand, to achieve its target of 100,000 new flats between 2021 and 2025, the government has already launched approximately 63,000 units in the three years from 2021 to 2023, averaging around 21,000 flats annually.

However, the pace of new flat launches is expected to slow down slightly in 2024, with about 19,600 homes being introduced, which is slightly below the average of the previous three years. This anticipated decrease in new flat launches could affect both the availability of and competition for new HDB flats in the upcoming year.

With the increased supply of completed condos in 2023, Singapore private home prices rose at slower pace of 6.7%. Experts predict this trend of stabilization will persist into 2024, significantly steadying the prices.

For the first half of 2024, the real estate market is expected to see high but stable property prices. Despite a somewhat subdued demand, a steady increase is anticipated. Property investors, however, are advised to proceed with caution. It’s crucial to carefully assess the affordability of monthly loan repayments before committing to such a significant financial decision.

IS 2024 A GOOD TIME TO REFINANCE YOUR PROPERTY IN SINGAPORE?

The possibility of the Federal Reserve reducing interest rates in 2024, as inflation shows signs of easing, suggests that the year could be opportune for refinancing home loans in Singapore. Such refinancing could be aimed at securing a lower interest rate, tapping into home equity for extra cash, or altering unsatisfactory loan terms.

Should the Fed implement more rate cuts than currently anticipated, and assuming stable inflation, it’s plausible that the 30-year fixed mortgage rate might drop below 6% by the end of 2024.

For homeowners, this potential decrease in interest rates presents an opportunity. If the rates in 2024 are lower than those at which they initially financed their mortgage, refinancing could result in considerable financial savings.

Even in the scenario where the Federal Reserve doesn’t reduce rates this year, refinancing remains a viable option if there’s been an improvement in your financial health, such as more stable income, lower debt levels, and a better credit score. An enhanced financial profile can lead to more favourable refinancing terms, including potentially lower interest rates.

As a rule of thumb, if your current mortgage interest rate is above 3.50%, you might be paying more than necessary. It’s advisable to check the interest rate for which you now qualify and recalculate your monthly payments under a new loan. This exercise will help you understand the potential monthly savings that refinancing could bring.

When contemplating refinancing, it’s important to factor in all associated costs, including any penalties for early loan repayment, to accurately assess your potential savings.

Your duration of stay in the property is another crucial consideration. Refinancing is more beneficial if you plan to stay in your home for a long period, as the savings from a lower interest rate accumulate over time. However, if you’re planning to sell in the near future, the costs involved in refinancing may not justify the decision.

Besides switching to a new lender, borrowers can also explore the option of repricing with their current bank. This process usually involves less paperwork and is faster. Repricing typically incurs an administrative fee, which generally ranges from $200 to $800.

Even without a general decrease in rates in 2024, refinancing could still be a wise decision, particularly in light of predictions of an economic downturn within the year.

2024 might be an ideal year for some homeowners to refinance, but it’s not necessarily the right choice for everyone.

DOLLARBACK MORTGAGE’S COMPREHENSIVE APPROACH TO DELIVERING MORTGAGE ADVICE

Buying a property is a long-term commitment. While current interest rates will have an influence on home prices, there are still many other aspects that we need to consider when deciding on whether it is a good time to buy a property.

We need to think holistically about all of these things considering the long-term benefits and savings rather than just making a decision based on the current interest rates.

DollarBack Mortgage takes a comprehensive and holistic approach to deliver long-term mortgage advice of minimally three years in the future. It allows property investors and homebuyers to look beyond the interest rates offered by banks and make a smart home-buying decision that helps make long-term savings on home loans.

You can connect with a DollarBack Mortgage consultant to navigate through the complexities of the mortgage market with ease and confidence. We help homeowners find the best home loan in Singapore across all major banks and compare mortgage rates.

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