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How is mortgage interest calculated in Singapore and historical trends

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Most bad decisions in home loans happen due to a lack of knowledge or good advice. In this article, we start off discussing how mortgage interest rates are calculated, what impacts mortgage rates, and their cyclical nature.

We will also look into how the COVID-19 pandemic has affected mortgage rates in Singapore and what can you expect in 2021 and beyond. You will get expert tips on whether you should buy or refinance a property in Singapore in 2021.

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.

When explaining the terms & conditions of a home loan to borrowers, banks tend to provide an amortisation schedule (usually in a table format) to explain how payments are structured over the loan tenure.

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

Although an amortization 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 amortizes:

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 it’s highest during the first years 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 your 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 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 home 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 or 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

How long you will take to repay the loan is inversely proportional to the interest rates offered. Shorter-term mortgages will generally be awarded lower interest rates as you will be paying down the principal balance at a faster rate which in turns means less of a default risk to the bank. Get in touch with a mortgage consultant to find the loan tenure that best fits your budget (monthly repayment).

Interest Rate Type

There are two common types of mortgage rates: fixed rate and floating rate. Fixed mortgage rates do not change and remain the same for a set number of years while the floating interest rates tend to fluctuate and change (go up or down) over time. 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 include inflation, economic growth, the US Fed’s monetary policy, the bond market and the public and private housing market conditions.

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.

The dependency of mortgage rates on several factors as well as their cyclical nature reinforce the fact that one can’t decide on making a long-term commitment (2o 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 and the best way to predict the future is to study the past.

Historical data of housing loan interest rates in Singapore

Impact of Global financial crisis (2008 to 2014)

The 2008 financial crisis, which originated in the United States, was a severe worldwide economic recession that affected many countries and lead to a global financial crisis unseen since the Great Depression (in the 1930s).

The crisis stirred up due to proliferation of financial products associated with risky mortgage loans (the famous subprime loans) given to low-income US households. The very low interest rates were increased significantly after a few years with the brutal increase in monthly repayments, which resulted in many households with subprimes having to default on their loans after a few years.

The securities associated with these subprimes lost their value in a matter of time, which is when the financial products revealed their truly toxic character. US Banks lost confidence in the available financial products on the market and stopped transacting.

This followed a massive financial paralysis – the first to affect so many nations at the same time. Since foreign banks were active participants in the US housing market during the boom, the crisis also knocked over financial systems and economies in other countries, including Singapore.

Despite an average growth rate of nearly 8% from ‘04 to ‘07, Singapore was the first East Asian country to succumb to the global economic crisis. The country’s economy, which was heavily dependent on exports to the developed world (US and Europe) was hit due to slowing US and UK economies.

This banking crisis in the US and its domino effects had clearly exposed vulnerability of the Singapore mortgage industry and its economy as a whole against the global economic shocks. It took around six years for mortgage rates in Singapore to start on a recovery phase. It was hailed as Singapore’s worst-ever slump!

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.

How Covid-19 has impacted mortgage rates in Singapore (2020)?

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

The Covid-19 pandemic has had a considerable impact on the global economy, and the Singapore mortgage industry is 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 alike, the mortgage market experienced turmoil due to the Covid-19 pandemic.

Since the start of the pandemic, mortgage interest rates have remained low, hitting an all-time low. In fact, the US Federal Fund has committed that mortgage interest rates will be around zero for at least the next two years (until 2023) to boost the economy.

But there’s a silver lining. This has 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.

However, as the economy recovers from the pandemic, interest rates are expected to follow suit. For now, central banks like the United States’ Federal Reserve and the Monetary Authority of Singapore (MAS) have gone “all in” to help spur the economic activity.

Since most banks in Singapore offer SIBOR-based home loan packages, it is the most widely used benchmark for home loan packages in Singapore. One of the major factors that affect SIBOR includes changes in US Federal Fund’s rates.

As a result, 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 Monetary Authority of Singapore, has also dropped from 1.8% in 2019 to 0.8% in 2020.

What are mortgage rates like in Singapore in 2021?

Reeling from the effects of the COVID pandemic in 2020, both floating and fixed mortgage rates in Singapore have reached an all time low in 2021.

For floating mortgage rates, current interest rates are as low as 0.78% on SORA packages and 1.00% on fixed deposit packages.

Fixed mortgage rates currently are within a range of 0.95% to 1.68% depending on the fixed term.

If you are considering a housing loan, do compare the banks with the cheapest home loans to ensure you get the best fit for your needs.

What will mortgage rates in Singapore be like in 2022 and beyond?

As mortgage rates in Singapore are currently at an all time low, the only way forward would be an increase. Based on the GDP forecasts in 2021, it seems the Singapore economy is on the path to a steady recovery.

As with any healthy economic growth, as inflation sets in, it would ultimately result in higher mortgage rates (do note Singapore does not directly influence inflation via interest rates as part of it’s monetary policy).

Also, with the advent of SORA being the main benchmark and replacing SIBOR in the near future, Singapore’s mortgage rates would be much more domestically controlled.

Unlike SIBOR, SORA would have less of a correlation towards the US federal reserve rates and any historical data tying in SIBOR and Singapore’s mortgage rates have to be now taken with a pinch of salt.

Therefore, even though we refuse to speculate on the position of interest rates, the general consensus seems to indicate a slight increase in the mortgage rates in Singapore in 2022 as long as we continue on a positive GDP growth.

Is 2021 a good time to buy a property in Singapore?

Home buyers looking to realise their dream of buying their own property in Singapore might not get a better chance than ‘right now’. This current phase of low-interest rates is an opportune moment for homebuyers across the country.

If you consider some of the cheapest home loan packages offered by Singapore banks right now, the interest rates for first-year can go as low as under 0.80%. Since the slightest difference in interest rates can make a huge difference, it is definitely a great time to take advantage of low-interest rates.

Now since every potential homebuyer wants to take advantage of such a situation, there is already a bidding war for both HDB and private homes (which is also driving up home prices).

Pro Tip: Head into your home search with a In Principle Approval (IPA), which will not only help you figure out the house you can afford but will also portray you as a serious and qualified buyer in the eyes of the seller.

However, property investors must exercise caution and evaluate the affordability of the monthly repayments before taking a financial step as significant as this.

You don’t want yourself to be caught in a situation where you are unable to afford the mortgage home loan in case interest rates adjust upwards when the economy picks up.

Is 2021 a good time to refinance your property in Singapore?

Talking about 2021, when the mortgage rates are likely to stay low for at least next year, this is an ideal time for homeowners to refinance their mortgage and lock in lower interest rates for the long term.

Apart from refinancing with a new bank, borrowers can also consider repricing with the same bank. It is generally less paperwork and tends to be quicker. In most cases, repricing involves an admin fee, generally between $200 to $800.

In general, if you are paying more than 2.4% interest, you are simply paying more than you need to and should consider refinancing. Remember to calculate your potential savings by adding up the costs of refinancing and if there’s a penalty you will face for paying off your loan amount early.

Check the new interest rate you would qualify for on a new loan and calculate your new monthly payment to see how much you will save each month.

As the economy begins to revive, it is expected that refinance and mortgage rates will gradually rise over time. That means people looking to buy a house or invest in property, or homeowners looking to refinance their property still have a good chance to lock in remarkably low rates.

While nobody has the crystal ball to future mortgage and refinance rates trends, the consensus of the industry experts is that mortgage rates will inch upward in the first half of 2022 once vaccines are widely available and life begins to see a return to normalcy from an economic perspective.

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.

Final Thoughts

The mortgage rates are likely to stay down in 2021 and will rise gradually if no new crisis knocks at the door. The Covid-19 vaccines have shown there is light at the end of the tunnel.

However, the risk of more infectious virus mutations will continue to be a threat to economic conditions. That is why it is critical for home buyers and property investors to also look beyond 2021 and learn about which bank mortgage loan will work the best for you considering the two to three-decade commitment.

You can connect with a DollarBack Mortgage consultant to navigate through the complexities of the mortgage market with ease and confidence. We help home owners find the ‘best home loan rates’ and other features that best fits their situation.

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