Buying a home allows you to build equity and is cheaper than renting over time. So if you want to lead a stress-free life, you have enough reasons to purchase a decent home in Singapore, regardless of whether you have the funds.
Remember, housing loans are designed to make homeownership easy for individuals and families and are easy to calculate. How is housing loan interest calculated?
That’s a great question since learning how to calculate mortgage rates can help you to manage your finances better.
This article explains how loan interest is calculated and how much you’ll actually pay if you take a housing loan today. Additionally, it provides reasons why the mortgage market in the country favours prepared borrowers and more.
How Is Mortgage Interest Calculated In Singapore?
In this section, we focus on how lenders in Singapore structure loan payments over the repayment period. It’s the simplest way to answer the critical query ’how is housing loan interest calculated?’
Before Sep 2009, most lenders preferred interest-only loans, meaning they typically required borrowers to pay loan interest first.
For example, a lender would ask you to pay interest for the initial five to 10 years and start serving the principal later. You would have paid nothing towards settling the loan at the end of this period.
Today, interest-only loans are illegal in the country, leaving loan amortisation as the only acceptable way to calculate mortgage interest.
What is loan amortisation? This term refers to paying the interest and principal throughout the loan tenure.
While the rate comprises a significant portion of the monthly repayment in the initial days, it declines gradually over time. So, this method gives the borrower an easier time managing monthly repayments.
An amortisation schedule also gives you some authority over the property during the loan tenure as you pay the loan and the interest concurrently.
For example, a lender can charge you an interest of 4% amortised per month. In this case, the interest rate per month remains at 4%, but you can pay more than this rate for the first few months and reduce it over time to a figure of less than 2%. The final total interest should be 4% paid using the reducing balance method.
Let’s use a mortgage of $500,000 on a 30-year tenure with 3% monthly interest amortised to illustrate this further.
- For the first month, you can pay a principal amounting to $181.666.67 and $10,000 as interest. (The rate is 5.5% of the monthly instalment.
- In the second month, you should pay 3% of the remaining balance, which is $318, $333.33). However, you pay more than this again to reduce the loan cost.
- In the 50th or 60th month, you might pay 2% of the remaining balance since the 3% was amortised.
Note that the monthly payment remains the same throughout, but the interest changes due to variations in the remaining balance and the amortisation, which requires you to settle a larger part of the interest in the initial stages.
Also, you can use an online calculator if you want to simplify the entire process.
How Much Interest Do You Actually Pay?
We’ve answered the query, ‘how is housing loan interest calculated,’ but you might still be asking how much interest you should actually pay.
How a mortgage interest rate is calculated in Singapore depends on several factors. Here are the most common ones:
Choice Of Housing Loan Lender
According to the Monetary Authority of Singapore, licensed money lenders can charge a maximum of 4% per month. In other words, any money lender that exceeds this limit is guilty of a serious offence under the law.
Banks are more affordable than most money lenders.
You can also tap on a home loan at a concessionary interest rate if you borrow an HDB loan. However, to qualify, you must meet the following criteria:
- Use your property as collateral
- Allow interest to be charged from the first disbursement
- Be eligible for a loan
- Be ready to pay the down payment before the loan is disbursed.
- Be a HDB flat buyer.
For HDB loans, you pay an interest pegged at 0.1% above the CPF Ordinary Account rate. It can be revised depending on the prevailing CPF rates.
Type Of Mortgage Rate
You can also choose between fixed and floating interest rates. As the names suggest, if you choose a fixed rate, you pay the same amount for the entire loan tenure or the first few years. This rate doesn’t depend on market conditions.
Conversely, if you go for the floating rate, the amount you pay per month keeps fluctuating since it depends on a reference rate like the Singapore Swap Offered Rate (SOR) or the Singapore Interbank Offered Rate (SIBOR).
Note: The law requires Singapore banks to inform borrowers in advance (typically 30 days) before changing their loan rates.
Home Loan Tenure
The amount of time that you require to repay your loan is directly proportional to the interest you should pay. In other words, short-term housing loans are often cheaper than long-term mortgages.
Lenders consider the amount of risk your loan tenure gives them to arrive at an accurate rate. So, they award higher interest due to the high probability of defaulting on long-term loans.
One of the most common factors determining your loan tenure is your Total Debt Servicing Ratio (TDSR).
In Singapore, it is 55%, meaning you can use 55% of your salary to service your debts. For example, if you earn $10,000, your TDSR would be $10,000 x 55 / 100 = $5,500.
In other words, if you are already using $5,000 per month to service a loan, you can’t spend over $500 more on loan repayment.
The Mortgage Servicing Ratio (MSR) can also determine your loan tenure. This term refers to the fraction of your gross salary you can use to service your housing loan. It can’t exceed 30% in Singapore.
Using the same example above, your MSR would be $10,000 x 30 / 100= $3,000. This would mean you can’t spend more than $3,000 per month of your monthly income on serving a mortgage.
Credit Score In Singapore
A credit score also gives banks a reliable way to determine their clients’ creditworthiness. The Credit Bureau of Singapore calculates each person’s score based on their financial history, like the history of debt inquiries, late payments, and irresponsible credit card use.
A higher credit score suggests that you are a higher-risk borrower, and that’s why it usually prompts banks to award higher interest rates.
Home Loan Amount And Property Cost
The price of your property directly affects the loan size. Because of this, it has an impact on the interest rate you get.
Banks are commercial entities and focus on profit margins. If they consider that you are offering a low amount of risk, they can offer you a lower interest rate to improve their competitiveness. Still, they also consider the economic value of your offer. For that reason, you are highly likely to get a lower interest rate if you want a large mortgage.
Are Mortgage Interest Rates Fluctuating?
History suggests the mortgage market favours prepared borrowers. The rates keep fluctuating depending on various reasons.
Based on this cyclical nature of mortgage rates, you can’t rely on the current rates if you want to purchase a home after five or 20 years from now. By studying the past, we can learn to budget better, but the best thing is to take action when the rates are low.
If you are wondering whether 2023 is the best time to take a mortgage, read on for a brief historical analysis that will give you the correct answer.
How Mortgage Rates Dropped In 2020
The Covid-19 pandemic hit the global economy in 2020, threatening to cause the worst financial crisis worldwide. During this period, the Singapore mortgage industry was not spared, forcing the Monetary Authority of Singapore to step in and reduce the mortgage interest rate to a historically low level.
Since most banks in the country use SIBOR policies, the loan interest dropped from 1.9% to 0.25% in June 2020. Don’t forget that SIBOR’s rates depend on the US Federal Funds rates.
Singapore’s Long-Term Interest Rate also dropped from 1.8% in 2019 to 0.8% during the height of the pandemic in the same year.
As you can see, the rates declined to an incredibly low level within a short time, but do you know what happened after that?
How Mortgage Rates Have Fluctuated Between 2021 and 2023
In 2021, the floating mortgage rates reached 0.78% and 1.00% on fixed deposit packages on SORA packages.
Depending on the term, fixed rates were between 0.95% and 1.68%.
Once the economy began to recover from the effects of Covid-19, it naturally resulted in a slight increase in interest rates. The government took advantage of the steady recovery of the economy to increase the rates slightly.
The introduction of SORA as the main benchmark promised to eliminate the influence of foreign banks on the Singapore mortgage interest rates.
In 2023, most countries, including Singapore, are working hard to manage soaring inflation.
In the first half of 2023, the central bank will likely continue with its 2022 trend of hiking interest rates slightly as it tries to manage the soaring inflation. Economists expect the three-month SORA to range from 3.3% to 3.5% for several months this year.
Is 2023 The Best Time To Buy A Home In Singapore?
While nobody can forecast with 100% accuracy the future of housing loan interest, there is industry consensus that it will continue to increase in 2023. The soaring inflation is partly responsible for this forecast.
In short, consider the cyclical nature of mortgage rates when calculating your actual rate. You can also evaluate past and current trends to see whether you are happy with the current rates before taking the next action.
Calculate Your Housing Loan Interest with a Calculator
Housing loans simplify home ownership.
Learning how to calculate housing loan interest with an online solution can also help you to manage your finances better even when the rates fluctuate, and that’s why we’ve answered the question, ‘how is housing loan interest calculated’ in detail here. You can use the formulas we’ve provided and simplify the process further by using an online calculator.
Don’t wait to own your home. Contact us today for more information on how you can apply for a loan through our reliable and simple process at U Credit.
