Interest is a fee charged by banks for lending you money. Essentially, interest is like “rent on money”.
In Singapore, housing loan interest rates are usually pegged to Singapore Interbank Offer rate (SIBOR) plus a spread. For example, if the current SIBOR is 1%, the interest rate on a “SIBOR +1.25%%” loan would be 2.25%.
What is SIBOR?
SIBOR stands for Singapore Interbank Offered Rate and is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the Singapore wholesale money market (or interbank market). SIBOR is set by the Association of Banks in Singapore (ABS).
Different Types of Interest Rate: Fixed vs Variable Interest Rate
Fixed rate loans, where you get a guaranteed interest rate for the first few years of the loan term. After the fixed term, the interest rate is benchmarked to a reference rate.
Floating rate Loans, where there are no fixed periods and interest rate is variable for the whole term of the loan. In Singapore, the floating rate is generally pegged to Singapore Interbank Offered Rate (“SIBOR”) or Swap offer rate (“SOR”). Both these benchmark rates are fixed by the Association of Banks in Singapore, though SOR has been observed to be more volatile.
How is Interest on a Housing Loan Calculated?
Banks charge interest on the unpaid loan amount of your home loan (also known as the loan principal or outstanding loan balance). Generally, home loan interest rates are calculated and charged on a monthly basis.
As an example, let’s assume you borrow a SGD500,000 home loan from a bank at an interest rate of 2.5%.
In your first month:
The total interest charged by the bank is:
SGD500,000 x 2.5%/ 12 = SGD1,041.66.
Depending on your monthly instalment is, your interest charges may be less in subsequent months.
Assuming your monthly repayment is SGD2000.
In your second month:
Previous month’s interest charges = SGD1,041.66 (see above)
Amount allocated to reducing outstanding loan = SGD1500 (previous month’s repayment) – SGD1,041.66 (first month’s interest) = SGD958.34
Outstanding Balance in Month 2:
SGD500,000 (initial loan amount) – SGD958.34 (amount used to reduce outstanding loan in month 1) = SGD499,041.66
The total interest charged by the bank in Month 2:
SGD499,041.x 2.5%/ 12 = SGD1,039.66.
Daily Rest vs Monthly Rest
Your interest may be calculated either on a “daily rest” or “monthly rest” basis, depending on your loan agreement. The following diagram provides an illustration of the difference between “daily rest” and “monthly rest” interest calculation.
A home loan with daily rest calculation is almost always better than one with monthly rest calculation. The advantage is that you can save some interest charges if you make a large repayment towards your home loan mid-way through the month (before your loan repayment is due).
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