Since many Singaporean homeowners are likely to take up a home loan for their property purchase, they should understand that home loan packages are not one size fits all. Therefore, you will want to know what is happening with interest rates in Singapore, where they are likely to head, and whether it is better to choose a floating rate home loan in 2023.
Mortgage rates in Singapore have been continuously rising in line with global interest rates since last year, and the trend has continued in 2023. Moving ahead, interest rates are also likely to remain volatile.
Hence, it comes as no surprise that floating rate home loans are getting increasingly expensive, causing much stress to homeowners in Singapore.
This article will discuss floating rates in detail, factors contributing to the increase in floating rates, their pros and cons, and when choosing floating rates make the most sense.
Firstly, let’s understand what a floating rate is.
In Singapore, a floating rate refers to an interest rate that fluctuates throughout the tenure of the loan based on the prevailing market conditions and the benchmark rate the loan is pegged to.
With a floating rate home loan, the interest rates are tied to a benchmark (reference) rate that is pegged to the package and a bank spread or margin to form the total home loan rate.
The spread is an additional interest rate a bank or financial institution charges to cover administrative costs and profit margin. It is subject to change throughout the loan tenure, which may lead to changes in the benchmark interest rates.
With fluctuations in market conditions, the benchmark rate can rise or fall, which in turn can cause the floating rate to increase or decrease.
During favourable market conditions, the floating interest rate tends to stay low. Conversely, the floating rate tends to rise when market conditions are critical. Note that a change in the floating rate of your home loan will also affect your monthly repayment amount.
Now let’s look at the common benchmark rates found in floating rate home loan packages:
|Board rate||A bank-managed rate, fully controlled and determined by bank. Changes are not transparent.|
|Fixed Deposit Home Rate (FHR)||Pegged to the bank’s fixed deposit rate. Changes are somewhat transparent as it is monitored by the Monetary Authority of Singapore (MAS).|
|Singapore Interbank Offer Rate (SIBOR)||The interest rate at which banks borrow from one another, set by a panel of banks. Closely tied to the US Fed Reserve rate movements. Changes are transparent (but less transparent than SORA). To be phased out by 2024.|
|Singapore Overnight Rate Average (SORA)||SORA is the average rate based on the average of past borrowing transactions. The MAS website displays the SORA rates. Better visibility on interest rates.|
All these floating home loan packages are more volatile than fixed rate home loans, as they are subject to revisions and market fluctuations. This suggests that floating interest rates are a good choice during a typical downturn market, but can quickly rise when prices are rising in general.
It compels you to think about whether you should choose the floating rate option in a global inflationary climate, as we are experiencing now. Note that floating interest rates will soon be pegged only to SORA.
Before we go into the details, we think it is important for our readers to know why floating interest rates in Singapore are rising in the first place.
In March 2020, leading central banks across the world slashed interest rates to near zero to combat the detrimental effects of the COVID-19 crisis on the global economy. This is a common practice during a recession because lower interest rates help boost economic growth.
But as the global economies began to recover and normalise, the US Federal Reserve began to hike interest rates. Those who keep watching the market realise there were more interest rate hikes in 2022 than expected.
The rise in floating rates for home loans in Singapore is due to various factors, including the rising benchmark lending rate by the US Federal Reserve and the high inflationary environment.
Since most floating rate packages in Singapore are pegged to SORA or SIBOR, the rising federal funds rate greatly impacts Singapore’s mortgage rates. Both SORA and SIBOR benchmarks measure the interest rates on the interbank markets and have historically shown somewhat similar trajectories.
Note that the 3-month compounded SORA has increased from 0.1949% at the beginning of 2022 to 3.74% currently September 2023.
Additionally, the rising inflation rate is also causing interest rates to rise. As inflation increases, so does the price of everything, including mortgage rates, thus affecting your SIBOR or SORA pegged mortgage packages.
Despite the increase in floating interest rates, there are still some benefits of choosing a floating rate over a fixed rate to finance your home purchase.
Information regarding floating rates like SIBOR and SORA can be sourced online from the ABS and MAS websites respectively, making them more transparent.
When interest rates are expected to decline in future, those subscribed to a floating interest rate package pay less interest on the principal loan amount. It means you could save more on interest payments in the long run.
Floating rate home loans are suitable for property investors wishing to make partial or full payments anytime without incurring a penalty. In a rising interest rate environment, it may help you to pay off your loan faster and save on interest costs.
If you are comfortable with the uncertainty and volatility of floating rates, i.e. have a higher risk appetite, you may be able to take advantage of lower rates in the short term in a rising interest rate environment.
Floating rate home loans may not be very useful and practical for some homebuyers due to the following reasons:
When choosing floating interest rates, it may cause a fluctuation in your monthly instalments, resulting in higher interest payments. It could be a problem if you have limited financial resources or are already stretching your budget to afford the home loan.
To gain a more significant profit, banks typically charge a higher spread on floating interest rate packages as the number of years increases. It would mean the borrower has to pay higher interest costs.
If you subscribe to a floating interest rate package, you can experience any fluctuation in interest rates. In a rising interest rate environment, the volatility associated with floating rates makes it difficult to plan your finances and budget accordingly.
For those who are risk-averse and look for stability and predictability in monthly instalments, a floating interest rate package might not be suitable.
Homebuyers and property investors who are financially savvy and able to monitor interest rate trends should consider floating interest rates for a home loan to save money in the long run.
Property owners who are also considering selling their property in the short term or would like to make lump sum repayments annually are better suited for floating rate home loans since they provide the flexibility for those scenarios without incurring hefty penalties.
If volatile market conditions don’t deter you, and you have plenty of wiggle room in your finances should the interest rates go up, then floating rates may be a good option.
Below we will discuss some features available in floating rate packages that may be helpful when managing your loan:
Most fixed and floating rates home loan packages come with a free package conversion to entice and convince homeowners to keep their loans with their existing banks.
However, some floating rate packages offer free conversion anytime during the lock-in period or in case the bank raises the mortgage base rate. It helps homeowners to switch to a more suitable package that may come up within the free conversion offers.
If you have plans to sell your property in the near future, pay down on your loan, or restructure the loan or the ownership of the property, a shorter lock-in period can work well for you. A shorter or no lock-in period offers homeowners more flexibility to decide what they would like to do for their home loan and property after the expiry of that period.
Therefore, try to select a floating rate package offering a short lock-in period of only one year compared to a minimum of 2- or 3-year lock-in period required for fixed rate packages.
Certain floating rate packages will allow a portion of your cash deposits to earn the same interest rate as your floating rate package. They allow you to reduce your interest expense for your housing loan, and you pay off your principal balance faster.
Such interest offset mortgage accounts are suited for business owners or investors with some cash or deposits to be deployed or used in future but currently sitting in low-interest savings or current accounts.
With the current economic uncertainty, many homeowners are feeling confused and stuck as they are finding it hard to decide whether they should choose a fixed rate loan to lock in current rates or pick a floating rate loan package since mortgage rates have increased significantly in the last year and could go even higher.
While floating rates have the potential to save you money in the long run, they also expose you to the risk of higher monthly payments in the current rising interest rate environment.
|Criteria||Fixed rate||Floating rate|
|Interest rate||The interest rate remains unchanged throughout the lock-in period, ranging from 1 to 3 years.||The interest rate may rise or fall based on market conditions and varies throughout the life of the loan|
|Stability||Borrowers enjoy certainty and predictability||Borrowers are exposed to interest rate fluctuations, causing uncertainty in monthly payments|
|Risk||Interest rates generally increase abruptly after the lock-in period; protected from fluctuations during the lock-in period||Borrowers face the risk of higher rates in a rising interest rate environment|
|Prepayment penalty||May come with early full- or partial- prepayment penalties||Do not typically have prepayment penalties; allows repaying your loan anytime|
|Suitable for||Those with low-risk appetites and value stability||Those who seek opportunities to save|
Whether to choose a fixed or floating home loan should depend on your circumstances. For example, ask yourself what matters more – is it the certainty of monthly payments or maximising savings in the longer term?
If you want to know how much you would be paying each month so that you can plan and manage your finances accordingly – without any surprises, then a fixed rate loan might be a more suitable option for you. However, it is better to pick a shorter lock-in period for a fixed rate home loan as interest rates could fall in the next one or two years, and you might want to save money by refinancing.
As a borrower, if you think the interest rates have gone up substantially and they now have little runway to go any higher due to recessionary pressure, then it would make sense to go with a floating rate home loan package. However, to be safe, you might want to set aside some extra cash should interest rates rise contrary to your belief.
Likewise, if you prefer the certainty and stability of a fixed rate bank loan but don’t want to miss out on the chance to enjoy lower floating rates in case the market rates decline, you might want to consider the 2-in-1 home loan package from DBS.
Under this approach, you get to enjoy the best of both worlds. You can park a portion of your home loan under the fixed interest rate for your peace of mind, while the remaining loan amount can go under the floating rate home loan package.
Before committing to any home loan package – fixed, floating or hybrid – make sure you check the relevant fees (valuation fees, legal fees, etc.) and other conditions related to refinancing or repricing. Please note that you can’t refinance your home loan during the lock-in period without incurring penalty fees.
Ultimately, it boils down to whether you are looking for stability or the potential for lower interest rates. The decision whether or not you should choose a floating rate for your home loan in Singapore depends on your individual financial situation and risk appetite.
When looking to buy a house or refinance your home loan package, you must keep an eye on the prevailing market conditions and availability of different floating rate packages. When you are prepared for any potential changes in floating interest rates, you can seek professional advice to help you decide which floating home loan package to choose.
If you feel it is time-consuming and stressful to monitor the interest rate movements regularly, please don’t hesitate to get in touch with one of our mortgage consultants at Dollarback Mortgage. Our professional mortgage consultants will help you assess your risk appetite and optimise your property portfolio in line with your long-term goals.
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