The unrelenting increase in interest rates and consequently rising home loan rates by banks and financial institutions throughout 2022 to 2023 has been a point of conversation in the Singapore property market. The 3-month SORA (Singapore Overnight Rate Average) rate shot up from 0.195% on 4 January 2022 to 3.64% as of 9 June 2023.
Most banks also revised their fixed home loan rates upward a few times as the US Fed continued with aggressive interest rate hikes to tame the worst inflation it has seen in 40 years.
This article discusses the various strategies to manage your home loan and maximise your savings in the long run.
An interest rate is the cost of borrowing money, determined by the supply and demand of credit and inflation. The rise in interest rates translates into a higher cost of borrowing. If you borrow money for a home loan, the interest rate will help determine how much you need to pay to use the borrowed money.
With a rise in interest rates, your monthly mortgage instalments may also increase. This makes it hard to manage your home loan repayments and other finances. In other words, it can become more challenging to manage a home loan in a rising interest rate environment.
For example, you take up a home loan mortgage of $600,000 to purchase a completed condo/apartment in a mature estate for a 25-year loan tenure. Your interest rate is currently 2% but will increase to 3.5%.
As a result, your monthly mortgage repayment will increase from $2,543 to $3,003 due to the interest rate hike. It translates into an increase of $460 a month. Just imagine how an increased monthly repayment of $460 will impact your budget and ability to save for your goals!
Since the fate of Singapore’s interest rates is closely intertwined with the US interest rates, the mortgage rates in Singapore often rise in tandem with the increase in interest rates by the US Fed. This is why SORA rates have been increasing gradually in Singapore since the start of 2022.
Here, we will discuss various strategies you can employ to manage your home loan in Singapore.
If you are currently servicing a floating rate home loan, you may consider switching to a fixed interest rate package. A fixed rate home loan may be more beneficial for those seeking certainty that their monthly mortgage payments will remain unchanged for a specific number of years. It will provide you peace of mind and more stability in your mortgage repayments, especially when future Fed rate hikes might still be expected.
While fixed interest rates may be higher than floating interest rates initially, they tend to provide long-term certainty in your mortgage payments. Refinancing to a fixed rate package also mitigates the likelihood of SORA rate increases in case the overall interest rates go up.
Another good strategy for managing your home loan in a rising interest rate environment is to pay off your mortgage using your CPF savings while preserving your cash for other expenses. To do this, you must make regular contributions to your CPF OA.
Note that there are limits on the amount of CPF savings you can use to service your home loan. Check with your bank to determine the maximum CPF savings you can use towards your home loan.
One important thing to note is that CPF savings allow you to earn interest rates up to 2.5%. Therefore, it only makes sense to use your CPF savings only if the interest rate on your home loan is more than this.
Taking the rising interest rates into consideration, it may be a good idea to use your CPF savings to pay off your home loan because the current interest rates are higher than 2.5%. But if you have excess funds in cash to service your mortgage loan, it may be better to balance your cash and CPS savings to pay off the home loan.
If a couple has multiple properties, there is a possibility that they can move to a fixed rate for some properties and choose a floating interest rate for others so that they have a balanced portfolio. It allows homebuyers to spread the risk between two portfolios while enjoying the best of both worlds.
For example, if you own an investment property from which you are collecting rental income, then it makes sense that you shift to a fixed rate mortgage package so that your rental can cover the mortgage instalment as well as maintenance costs.
This way, if the interest rates go higher, you will not have to fork out extra money on top of the rental to pay off the mortgage loan. Knowing how to decide between a floating or fixed rate home loan is a crucial factor to help balance your interest expenses.
Homebuyers should leverage higher interest-yielding savings tools to tackle rising home loan rates. It may include the Singapore Savings Bonds (SSB), money market funds, endowment insurance plans or even fixed deposits.
Having a free interest rate conversion within a lock in period or a shorter lock in period allows for flexibility in optimising your mortgage interest rate sooner rather than later. You don’t want to be caught in a lock in period on a higher interest rate in the event the interest rate cycle starts to reverse and banks start releasing new lower home loan rates.
If you are still on a SIBOR-linked home loan package, you may consider moving to a SORA rate home loan package. SORA is a backwards-looking interest rate based on an overnight transacted rate, while SIBOR is on the future estimate of lending rates. SIBOR rates are almost 1% higher than SORA right now, so if you are still pegged to a SIBOR home loan, you are already paying a higher home loan interest.
Furthermore, SIBOR rate packages are likely to phase out in 2024 or maybe earlier. It will compel clients to move to other available home loan packages offered by banks, which they might find expensive, thus aggravating the risk.
In general, refinancing gives you an opportunity to switch to a more competitive mortgage compared to your existing home loan. Even though your chances of getting a lower interest rate in a rising interest rate environment are typically lesser, you should refinance from a floating rate to a fixed rate home loan early in the increasing interest rate cycle which can save you thousands in the interest payments in future.
Apart from the lower interest rate loan package, consider the overall refinancing cost, like legal fees, processing fees, etc., in your calculations. When these additional costs add up, they may negate any potential savings from the new lower interest rate.
A smart way to refinance your bank loan would be to find a competent mortgage broker who can help you find exclusive interest rate packages not available to the public in general.
Reducing your home loan interest rates can be a great way to lower your monthly mortgage payments and save money.
Explore all the home loan packages available with lower interest rates from multiple lenders and compare them with your existing mortgage plan while considering your individual circumstances like current income, outstanding debts, etc. Do not forget to consider the associated fees with each loan package when calculating potential savings.
Lenders tend to offer lower interest rates for shorter-tenure loans as they consider it less risky. However, it will mean that you have to pay more each month. But if you have more disposable income every month, choosing a short-tenure loan may be the best bet.
If you could pay a higher downpayment or pay off your loan faster, you can potentially reduce your home loan interest rates as it reduces the lender’s risk. Also, by making a larger downpayment, you will pay less interest over the life of the loan.
Just like making a larger downpayment, a good credit score helps you qualify for better interest rates and lower monthly repayments. Borrowers with a high credit score are considered less risky by lenders and more likely to be offered a low interest rate. You can also qualify for better rates while refinancing your home loan. So, it is never too late to improve your credit score!
If you have the financial ability, consider making lump sum payments towards your home loan mortgage whenever possible. It will help reduce your loan tenure and save a lot of money on your interest payment. Before making any financial decision, do your own research and consult a mortgage expert if you feel the need.
Even when interest rates are rising, some lenders may offer better mortgage deals than others. Whether you are a first-time homebuyer who wants to buy a new home or someone looking to refinance their current home loan, it is possible to negotiate mortgage rates offered by the lender.
If you are a responsible borrower with a good credit score and a strong repayment history, your potential lender may be willing to negotiate with you.
Start with shopping around with multiple lenders and then ask your lender if they are willing to match a lower interest rate offered by another lender. You can also use online comparison tools to check what interest rates other banks are offering now. This will help you negotiate a better deal with your current lender.
However, there is no guarantee that your lender will agree to lower your interest rate. The best you can do is make a stronger application that gives you some leverage to negotiate your mortgage interest rate. If you have sufficient time, consider saving for a larger downpayment, raising your credit score, or paying off your monthly debts.
It is natural to think of interest rate hikes as all bad news for homebuyers. When buying a home in a high interest rate environment, you are likely to end up paying more. The higher mortgage payments due to increased interest rates affect the overall affordability of the buyer. Despite how it seems, there may be a few surprising advantages of purchasing a new home when interest rates rise.
Higher interest rates reduce the number of homebuyers who qualify for a mortgage loan. This reduces the competition for homes available on the resale market.
While rising interest rates continue to push buyers who can no longer afford higher monthly payments out of the market, a new inventory of homes is coming into the market. It means qualified homebuyers will now have more choices for homes.
After aggressive back-to-back interest rate hikes throughout 2022 and early 2023, the US Fed has pushed the target range for the Fed funds rate higher to 5.00% – 5.25% in its May 2023 meeting.
However, according to some industry analysts, this most recent interest rate hike by 25 basis points may be a sign that the US Fed might be putting the brakes on these jumbo hikes in 2023.
It may be pointing towards a shift from aggressive hikes to more modest increases in home loan rates in the second half of 2023. If this does happen, we would then potentially see mortgage rates going down towards end 2023 or early 2024.
For most of us, buying a home in Singapore is the largest financial commitment we will ever make. Therefore, it is important to understand how rising interest rates may affect our home loan mortgage. After all, a higher interest rate translates into higher monthly instalments.
But if you proactively employ the strategies discussed in this article to manage your home loan, you can make a more informed decision and thus save more money in the long run.
Regardless of the interest rate movements or choice of home loan packages, every homeowner should set aside sufficient funds – at least worth two years of monthly instalments – as a buffer in cash or liquid assets. It will help homeowners pay their monthly mortgage instalments for the next couple of years and deal with future rate hikes or unexpected circumstances such as loss of job or income.
If you need help securing the best home loan interest rate to save more on interest payments to the bank, please feel free to reach out to our team of expert mortgage consultants. Our experts can provide an unbiased view of how to manage your home loan and help you with your bank loan dilemmas.
You can speak directly to one of our mortgage consultants about your specific situation and choose what is best for you in a rising interest rate environment.
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