So you’ve reached single-digit millionaire status, or are about to, and now it’s time to buy a private property. Congratulations, but you’ll quickly find that – while your old HDB loan was straightforward, Singapore’s home loans are a nightmare of convoluted terms and conditions, and trying to figure out what you pay is an exercise in migraine-tolerance. We’ll do our best to explain the mess:
Can’t I just know how much I’ll pay every month, till the end of the loan?
No.
Sorry, but that’s just how it is.
No financial institution in Singapore offers a perpetual fixed rate home loan. Even if a loan is fixed, it’s only fixed for a certain length of time – typically three to five years. After that, it goes right back to being a variable rate.
This means that over the next 25 to 30 years, or however long you take to repay your home loan, the interest rate will bounce up and down. It’ll be cheaper on some months, pricier on others; and you don’t know with 100 per cent accuracy the total interest you’ll pay.
(Barring situations where you have a three to five-year fixed rate, and immediately sell the property before the fixed rate ends. Then you can reasonably know how much interest you’re paying; but most Singaporeans don’t flip houses like that).
So how is the interest rate worked out, exactly?
Most of it can be broken down into two ways.
The first is a loan that uses a Board Rate, or Internal Board Rate (IBR). This sort of loan has an interest rate that’s controlled by your bank. If they decide to charge more, you pay more. If they decide to charge less, you pay less.
A typical example of this is a fixed-deposit rate home loan: this is when the bank charges a mortgage rate that’s pegged to its fixed-deposit products.
In theory, as the bank pays out more interest, your home loan rates will rise. As they pay out less interest on their fixed deposits, your home loan gets cheaper.
That’s the argumentanyway, which the bank uses to convince you to take the loan: because the bank must pay out more interest if it wants to raise mortgage rates, it has an incentive to keep your interest rate low*.
The other way is just taking a loan where the bank just charges you whatever interest it wants to (gee, what can go wrong here).
The second is a loan pegged to SORA, although older home loans used to be pegged to SIBOR.
An explanation on the inner workings of SORA is about as exciting as watching arm hairs grow, so just know the quick summary: it’s the average interest rate at which banks are borrowing.
Unless your final paper on a banking module is due next week, that’s really all you need to know.
The interest rate you’re charged is typically (the bank’s spread, or what they’re charging you in fees if you like) + (the SORA rate).
So if the interest rate is 0.6 % + 3M** SORA, and the 3M SORA rate is 3.6, then the rate is 4.2 per cent.
You’ll usually find the bank charges a lower spread for the first three years, before raising the spread on the fourth or fifth year. It’s just a way to lure you in with lower initial rates.
It also lets the mortgage banker, who earns commissions from giving you the loan, say things like “Don’t worry, you can always refinance if the rate gets too high later.”
Because in Singapore we like to pretend mortgage bankers are all Hogwarts graduates, who can cast spells and foretell interest rates four to five years from now.
(It’s not always true, there may not be lower rates to refinance into, is the point I’m making).
Notice that, even if your bank maintains its spread, there’s no way to determine how low or high SORA will get. Given the long period of 20 or 30 years of fluctuating interest rates, there’s no way to know for certain how much you’ll pay.
This is just a fact that you’ll have to live with, once you decide to move up to the private property market.
*An argument that works because there are few cures for naivety. A bank can have different rates on different tranches of a fixed deposit, and they can avoid paying more interest even if they raise home loan rates – but that’s a topic for another article.
**3M means an interest rate period of three months. This means the rate is revised to meet SORA every three months. If it’s 1M, then the rate is revised to meet SORA rates every month. It’s uncommon to find interest rate periods besides 1M or 3M, though periods as long as 6M, 9M, or even 12M have appeared from time to time.
But it’s said that bank loans are even cheaper than HDB loans?
This is maybe 50 per cent true. There are times when the interest rates fall so low, the mortgages for private properties become even cheaper than HDB loans.
The HDB loan is always pegged at 0.1 per cent above the CPF interest rate (2.6 per cent), and it hasn’t changed in almost 20 years.
But if you look at bank loan rates after the Global Financial Crisis in 2008/9, you’ll see the rates were as low as 1.3 per cent – half of what HDB borrowers paid.
If you look at bank loan rates during the height of Covid, you’ll also see the rates seldom climbed past two per cent – again, cheaper than HDB rates.
Why? It comes down to Uncle Sam.
Whenever the United States runs into an economic speedbump, the US Federal Reserve will depress interest rates to stimulate the economy. This indirectly lowers home loans rates in Singapore.
But when the US sees low unemployment and economic recovery, they’ll bump up the rates. So as of 2023, with the US largely bouncing back from issues like Covid, the mortgage rates from banks are climbing to around three to four per cent.
Right now, private bank loans are pricier than HDB loans.
A lot can happen during the decades in which you service your home loan, so again, it’s almost impossible to predict how much you’ll ultimately pay.
Why do some banks charge more than others?
Banks have a quota on how much they want to loan out. As they near the quota, they’re less interested in giving out more home loans; so the higher they raise the interest rates.
That’s it.
Usually, the only reason to take on a higher interest rate is because a bank is willing to accept a higher valuation on your property (i.e., lend you more), or the mortgage banker is your cousin and you want to avoid dirty looks at the CNY reunion.
There’s a bunch of people who run all sorts of websites that offer to find you the lowest interest rate. These are mortgage brokers, and you may as well engage them since they don’t charge you anything (they get commissions from the mortgage bankers when you take the loan).
And before you think about it, no, you can’t beat the mortgage brokers by manually calling each bank and asking yourself. Unless you’ve worked in the industry, you don’t have the same connections the brokers do.
Brokers can get rates that are never advertised to the public, usually by hectoring the mortgage broker over how much business they’ve brought them.
How to deal with the headache of ever-changing rates
One way is to use a semi-fixed approach. This means constantly refinancing from one fixed rate package to another. The rate still changes, but it changes much less often than if it were left to float. A downside here, however, is that fixed rate loans tend to be pricier.
Another approach is to actively hunt for lower rates, and refinance every four to five years. Bear in mind though, that there’s no guarantee a cheaper loan is out there to be found.
A third approach, which is not something to be done casually, is to just pay off the loan as fast as you can – or perhaps even buy without using a mortgage at all. This is a very niche solution, as you’ll end up locking up a huge chunk of capital in an illiquid asset (how are you going to get the money out if you need it? Sell the house?)
It could make sense in certain scenarios, but consult a financial expert before you make such a huge commitment.
If you have more questions or need help, you can also reach out to Single Digit Millionaire for clarity.
