How To Prepare For Rising Home Loan Interest Rates In Singapore

How To Prepare For Rising Home Loan Interest Rates In Singapore

The Singapore Interbank Offered Rate (SIBOR) has risen sharply and then fallen back again in the past few months. While it’s nowhere as volatile as the meteoric rise and crashes of say, Bitcoin, it does signal that we should expect more movement in the coming months. In fact, SIBOR rates have been on the rise since 2015:

What affects SIBOR rates?

SIBOR rates are correlated to the federal funds rate in the United States. An increase in the federal funds rate would lead to an increase in SIBOR rates.

The fall in interest rates in the past month can be attributed to the decline in USD. However, homeowners should anticipate an increase in SIBOR rates, as the US Federal Reserve is expected to hike interest rates three times this year, and two times in 2019.

How do these rates affect you?

If you happen to be a homeowner on a floating-rate, SIBOR-pegged home loan plan, here’s why this matters: the SIBOR rates are used to price your home loan. Most SIBOR-pegged home loan interest rates in Singapore are derived by adding a premium (known as a ‘spread’) to the 3-Month SIBOR:

3-Month SIBOR + spread = home loan interest rate

This means that rising SIBOR rates could mean higher home loan interest rates, and therefore higher monthly home loan repayments.

Assuming you take out a loan of S$600,000 for 30 years at an interest rate of 1.7% per annum, here’s how much more interest you’d have to pay if your home loan interest rate increases:

Interest rate
1.7%
1.8%
1.9%
2.0%
2.1%
Monthly instalment
S$2,128.79
S$2,158.19
S$2,187.83
S$2,217.72
S$2,247.84
Monthly interest increase
-
S$49.58
S$99.17
S$148.76
S$198.41
Yearly interest increase
-
S$594.94
S$1,190.09
S$1,785.43
S$2,380.97

Preparing for future increase

In anticipation of rising home loan rates, here’s what you can do to be financially prepared:

  • Set aside funds. Set aside savings – in cash or other liquid assets – that can be used to pay your monthly instalments (ideally, for the next two years) in case of a rate hike. These savings can mitigate the short-term burden of higher interest rates, as well as give you time to look into refinancing or repricing your home loan.
  • Capital repayment. If you have extra savings, or have experienced a windfall in the form of work bonuses or others, you could put this money into paying off the principal of your loan.
Should you always pay off your housing loan early?
Before you use extra funds to settle your housing loan ahead of time, consider the opportunity cost of doing so. It can be more worthwhile to use your funds for the following:

  • Pay off other debts. Home loan interest rates are relatively low. Pay off high-interest debts instead, such car loans or credit card debts.
  • Retain mortgage insurance. If you have mortgage insurance, your loan will be paid off in the event of death, terminal illness or disability. Your extra funds then can be used to support you or your beneficiaries. If you have repaid your loan early, you would lose this financial buffer.
  • Invest. Saving or investing your funds could generate more returns, if the yield is higher than your home loan interest rate.

However, if these circumstances do not apply to you, and you are unable to get a higher yield of return than your home loan interest rates, then settling your home loan early could save you interest fees in the long run.

What can you do if home loan interest rates rise?

If your home loan interest rates have already increased, here’s what you can consider doing:

1. Refinance to a shorter-tenure loan

Review your home loan plan to see if there is a need for refinancing, which involves swapping out your current home loan plan for another. If home loan interest rates are rising, you can refinance to a shorter-term loan to reduce your interest payments over time.

To illustrate how much you could potentially save, let’s say you take out a S$600,000 loan at an interest rate of 3.5% per annum. Here’s how much total interest you’d have to pay for the following loan tenures:

As you can see from the chart above, a shorter loan tenure will mean less interest over the duration of the loan. However, before you spring for a shorter tenure, you’ll need to make sure that you have enough income to cover the higher monthly instalments. In addition, your new monthly instalments should meet the debt-to-income ratio requirements in Singapore – this means that your monthly debt obligations (monthly home loan instalment + other debts like car loans and credit card debts) should not exceed 60% of your income.

2. Refinance to another floating-rate loan with a lower interest rate

Take the time to compare other home loan plans for lower interest rates. You could also consider refinancing to loans that are pegged against other benchmarks, such as:

  • Fixed deposit-linked home loans. These loans are not fixed-rate loans, but loans that are linked to a bank’s fixed deposit account interest rates.
  • Loans pegged to a bank’s own internal board rate. The interest rates of these loans are set internally by banks, and not pegged to external benchmarks.

These loans generally offer more stable interest rates than SIBOR-pegged loans, though they are less ‘transparent’, in that banks do not disclose how these interest rates are set.

3. Refinance to a fixed-rate loan

You can also consider refinancing your loan to a fixed-rate home loan. Doing so means enjoying a stable interest rate for the first few years of your loan, regardless of whether SIBOR rates increase.

However, fixed-rate loans generally offer a fixed rate for the first two or three years, after which it gets pegged to SIBOR or other benchmarks. In addition, fixed-rate loans tend to be priced higher than floating-rate loans.

Here’s what a fixed-rate home plan might look like, compared to a floating-rate plan:

Year
Home loan interest (fixed rate)
Home loan interest (floating rate)
1
2.0%
SIBOR + 0.6%
2
2.0%
SIBOR + 0.7%
3
2.0%
SIBOR + 0.8%
4 and thereafter
SIBOR + 1.2%
SIBOR + 0.9%

Floating-rate home loan plans will be more cost-effective in a flat or declining interest rate environment. But when interest rates are rising, a fixed-rate loan can save you more money in the first few years of the loan.

4. Reprice to a different home loan package

Instead of refinancing your home loan, you can consider repricing it instead. Repricing also involves swapping out your home loan for another, but within the same bank that provides your current home loan.

Choosing to reprice your home loan has two key advantages over refinancing:

  • Less paperwork. As an existing customer, switching your home loan within the same bank is a relatively speedy process. Refinancing to a plan from another bank will take a longer time and involve more paperwork.
  • Less fees. The legal fees of refinancing can cost S$2,000 to S$3,000 – however, most banks will offer subsidies that will offset them entirely. On top of that, if you’re refinancing before your lock-in period has ended, you’ll be facing a penalty fee of 1.5% of your outstanding loan. It might be worth timing the refinancing to avoid this penalty. You’ll also have to pay for the bank to re-evaluate your property, which may cost S$200 to S$1,500. In contrast, repricing may incur much lower costs – charges depend on your bank, but can be around S$800 for processing fees.

Let’s say you have a S$600,000 loan. You’ve already paid off S$50,000 of the principal, but you’re still in the lock-in period. Here’s how much you may have to pay to refinance or reprice your loan:

RefinancingRepricing
Legal feesS$2,000 – S$3,000Processing feesS$800
Lock-in penaltyS$8,250
Valuation feesS$200 – S$1,500

However, this doesn’t mean that repricing is always a better option. If another bank is offering a home loan plan with far more competitive rates, legal fee subsidies and benefits that suit your needs, then it may be more cost-effective to refinance instead.

Are you prepared to face rising interest rates?

In the event of an interest rate increase, just remember that there are a few ways you can manage the hike. It would be a good time to review your home loan plan to see if there is a need for refinancing or repricing. In the meantime, budget your finances to anticipate higher home loan instalments in the future.

Check out iMoney’s home loan calculator to compare the latest interest rates and estimate your monthly repayment across different home loan packages in Singapore.

 

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