How Is Housing Loan Interest Calculated In Singapore?

Dexter Lee March 18, 2023

How Is Housing Loan Interest Calculated In Singapore?

A borrower with a faint idea about housing loan interest rates in Singapore tends to make calculation mistakes, which affects their credit performance.

Eventually, this ignorance can lead you to wrong financial decisions and uncontrollable interest rates.

In this article, we will discuss how is housing loan interest calculated in Singapore, the types of housing loan interests, and the factors that affect them.

How Is Housing Loan Interest Calculated In Singapore?

In 2009, the government banned all interest-only loans, making loan amortisation the only method to repay loans in Singapore.

Moreover, when you speak to bank agents about repayment methods of home loans, they tend to provide you with an amortisation chart. This chart indicates how the bankers distribute your payback amount over the loan tenure.

In simple words, the amortisation process explains how is housing loan interest is calculated in Singapore. Also known as a reducing balance method, it breaks down your monthly repayment amount into smaller portions.

Amortisation allows borrowers to spread these small instalments across the entire loan duration. Furthermore, it helps debtors pay off their monthly principal and interest amount.

Throughout the loan tenure, the interest amount decreases as the principal capital increases. As a result, the borrower finds it easier to clear the loan as the interest cost decreases cumulatively.

Note that the interest amount occupies a large portion of monthly instalments at the beginning of the month. Over time the interest amount decreases. It enables debtors to handle their loan repayment on a month-by-month basis.

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    Remember, the amortisation format only gives an idea of what to expect and how much interest and principal amount you must pay each month.

    Types Of Home Loan Interest Rates In Singapore

    In Singapore’s economic market, there are four categories of interest rates for HDB loans. They are:

    Fixed Rate Home Loans

    Fixed-rate home loans offer constant interest rates over the entire loan tenure. In laymen’s language, the interest will remain the same irrespective of the economic conditions.

    Banking experts often suggest borrowers look for a fixed rate for a period of two years or less. That way, the customer can refinance during the given period without obtaining a penalty.

    Furthermore, look for fixed-rate home loans with possibilities for conversion. Once the initial interest period gets over, the loanee can convert their interest rate plan to a fixed deposit interest rate. It helps them incur a consistent rate of interest.

    Despite being a popular choice among most loanees, fixed-rate home loans have downsides. It doesn’t allow you to refinance easily.

    When a debtor tries to change to a cheaper loan package outside the interest period, the bank or lender will charge them a 1.5% penalty on their outstanding balance.

    Singapore Interbank Offered Rate or SIBOR Home Loans

    SIBOR represents the average rate at which local banks lend capital to each other. The Monetary Authority of Singapore (MAS) monitors the entire exchange. In Singapore, SIBOR generally offers interest rates for one month or three months, during which the interest remains constant. At the end of each period, the bank revises the borrower’s loan plan.

    For instance, if you opt for a three-month SIBOR housing plan, then at the end of the third month, you’ll have to revise your home loan to match the SIBOR. Basically, your repayment status will change every one or three months, according to the SIBOR plans.

    To calculate the monthly home loan interest rate, you must add your SIBOR rate with what the bank charges. For example, SIBOR is 2.0% for three months, while your bank charges 0.7%.

    The formula states 3-month SIBOR + 0.7%. According to that, your three-month SIBOR results in 2.7%.

    Fixed Deposit Interest Rate (FDR/ FHR) Home Loans

    As the name suggests, fixed deposit interest rates closely associate with a bank’s fixed deposit interest rate. Furthermore, FHR is a broad rate type which left the borrowers in fear of fluctuating interest percentages.

    To assure customers that nothing as such would happen, banks like DBS came up with the idea to tie FDR with fixed deposits.

    In simple words, if a bank wants to increase the interest on a home loan, they have to do the same for fixed deposits. Such strategies balance the sudden spiking of interest rates.

    FHR loan interest rate is the combination of what the bank charges and the mean rate on fixed deposits for a given time. This is another solution to “how is housing loan interest calculated?”.

    Internal Board Rate or Board Rate Loans (BR)

    Banks fix the rates for broad-rate loans. They often raise the interest rate to match their competitors yet keep it close to the market value. Home loan experts suggest borrowers should only opt for BR loans when they have no choice.

    The only benefit of BR loans is when you find banks that haven’t raised their interest rates for a long time despite the changing market value. At times it’s also possible to find bank rates below market range. However, these possibilities aren’t definite and may vary based on socioeconomic conditions.

    The bank authorities control these interest rates, and debtors cannot expect a transparent rate movement. Moreover, this type of interest plan requires your trust more than anything else. You cannot expect a verified explanation when they suggest a new repayment detail.

    Factors Affecting Mortgage Rates

    Several factors influence home loan interest rates by varying degrees of percentages. Their influence results in the increment or decrement of the monthly principal and the total interest amount.

    Before applying for a mortgage loan, a borrower should study the factors bankers use to approve loans. In addition, these factors will help you understand your capacity. Based on that, you can decide which home loans to choose.

    The factors affecting mortgage rates are:

    Credit Report

    A borrower’s financial history reflects in their credit score. The Credit Bureau of Singapore gives out the credit performance report.

    It includes a loanee’s debt amount, instalments, previous loans, late payments, and credit card transactions. Remember, your credit score also depends on the history of inquiries, if any.

    These factors influence a borrower’s chance of attaining a mortgage loan from the bank. That’s because your credit score tells the bank if you’re trustworthy and reliable. Bear in mind that a higher credit score can get you lower interest rates on home loans.

    Reputed and licensed money lenders like CreditMaster give reasonable offers on a borrower’s credit performance.

    Loan Tenure

    It’s pertinent to note a borrower’s loan tenure is inversely proportional to the interest a lender offers. Likewise, long-term mortgages generally come with low-interest rates. Such a repayment arrangement allows you to clear the principal amount faster and assures the bank of less risk.

    Property And Loan Amount

    Your property valuation intermittently relates to the loan amount, which affects the loan interest. Banks are typically inclined towards offering minimum interest rates for high mortgage loans. The lender charges a maximum interest rate when you want to draw a small loan amount.

    Interest Rate Variation

    Two types of interest rates are commonly available – fixed and floating. The type of home loan interest a borrower chooses can influence their current or future loan payments.

    Total Debt Servicing Ratio (TDSR)

    The Singapore government uses this ratio to determine if debtors spend most of their monthly income on mortgage loans. It’s a cooling measure that the government uses to limit the amount of money you can borrow.

    Keep in mind, a borrower cannot pay more than 55% of the monthly income.

    What Are Refinancing And Repricing?

    When you change your current home loan to a new type for a lower interest rate, it’s called refinancing. This conversion from your recent bank is called repricing. But HDB debtors cannot refinance their bank loans.

    Make sure you review the home loan options regularly to determine if you can save money by refinancing. Check if this can be done when your lock-in period has come to an end.

    How Much Interest Do You Actually Pay?

    According to a typical example of a housing loan, you pay 2% interest per annum. On average, if you borrow $750,000 for a 25-year long-term loan, you pay $12,000 for the first ten years of the debt period. As time progresses, you’ll be paying way lower interest rates but higher principal amounts.

    Not many people know how much interest they pay to the bank annually. Though borrowers tend to repay every month, they must know how is housing loan interest calculated.

    If troubled about your interest amount and repayment processes, speak to reliable money lenders like CreditMaster for genuine recommendations on loan opportunities.

    Amortisation Method Is The Key To Calculating Home Loan Interest

    The interest rate reduction process for repayment has proved beneficial for most borrowers.

    However, various factors influence rising interest rates, and it’s necessary that you look into each of them before choosing one. Loan experts further advise that property investors should consider two to three decades of market conditions.

    Drawing property loans can be a tricky affair. It ranges from fluctuating interest rates to finding the right opportunity to refinance. You can seek professional help to guide you with the repayment procedure.

    Dexter Lee

    Born with a pen in one hand and a keyboard in the other, Dexter's been crafting words into beautiful prose since he was old enough to scribble on his walls (much to his mother's chagrin). He's a self-proclaimed pun master, often leaving his coworkers in stitches with his clever wordplay. He's been known to strike up conversations with strangers and turn their stories into captivating content that keeps readers coming back for more. Despite his unconventional approach to life and work, Dexter takes his job as a content manager very seriously. He knows that every piece of content he produces has the power to make a difference in someone's life, and he's committed to using his words for good.

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