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Choosing the Most Suitable Home Loan in Singapore
In partnership with RedBrick
6 Things You Need To Know To Choose Your Home Loan
1. Bank or HDB Loan
In Singapore, HDB flats represent about 80% of homes. HDB owners have a choice between taking a bank loan or a HDB loan. HDB loans are at 2.6% per annum.
Read Also: HDB Or Bank Loans? Which Is Better?
Bank Loan
Banks have been able to offer lower interest rates compared to HDB loans. This has made most bank loans attractive, even for buyers who qualify for HDB loans.
However, home loan rates charged by banks will fluctuate. In addition, once you take a bank loan for your HDB flat, you will no longer be able to revert back to HDB loan even if your bank loans interest rates goes up in the future. It’s a one-way trip.
HDB Loan
HDB loans tend to have stable interest rates. To qualify for a HDB loan, here are some criteria to be met.
Current Bank Loan Interest Rates
You can compare the various interest rates offered by banks in Singapore here.
2. Loan Duration
Your loan duration matters...a lot. It may be tempting to choose longer loan durations because that makes your monthly repayments look more “affordable”. But don’t be fooled by the appearance. The fact is that the longer your loan duration, the more interest you incur and the more you pay in total.
Illustration
| 10-Year Loan | 30-Year Loan | |
|---|---|---|
| Housing Loan | $500,000 | $500,000 |
| Interest Rate | 2.5% | 2.5% |
| Monthly Repayment | $4,713 | $1,976 |
| Total Interest Paid | $65,560 | $211,360 |
| Total Repayment | $565,560 | $711,360 |
A housing loan of $500,000 at an interest rate of 2.5% over a 10-year period will work out to be a monthly repayment of $4,713, with a total interest cost of $65,560.
If you extend the loan to a 30-year period, monthly repayment falls to $1,976. However, your total interest cost will be $211,360. In total, you pay $145,800 more in interest for taking a 30-year loan instead of a 10-year loan for a sum of $500,000.
3. Fixed or Floating Interest Rates?
Most home loan packages offered by banks allow homeowners to choose between fixed or floating interest rates. Understanding the differences between the two is relatively simple.
Fixed Interest Rate
The bank guarantees you a fixed rate for a period of time. This can be anywhere between one year to five years.
Since banks are in the business of borrowing money at a lower interest rate, and then lending them out at a higher interest rate, to be guaranteeing a fixed interest rate for a period of time is actually considered a risk for them. As such, most banks are likely to charge you a higher interest rate premium compared to floating rates.
It’s also important to note that fixed rates are only applicable for a period of time.
Floating Interest Rate
Floating rates are interest rates that change based on the benchmark rates that they are tied to.
In Singapore, two types of rates are usually used. They are the Singapore Interbank Offered Rates (SIBOR) and the Singapore Swap Offer Rate (SOR).
Most banks will charge the floating rates plus a margin. For example, a home loan could be quoted as 3-month SIBOR + 0.5%. This means you pay whatever the interest rate is for the 3-month SIBOR (e.g. 1.0%) + 0.5% for a total of 1.5%.
4. SIBOR or SOR?
Both SIBOR and SOR are common benchmarks that banks used to determine interest rates for home loans. They appear rather similar but are not the same.
Here's a guide to understanding how they are different.
SOR
SOR is quite similar to SIBOR with the only difference being that it takes into account the interest rate payable in US Dollar, and not Singapore Dollar. This means that SOR rate is affected by the USD/SGD exchange rate.
SOR tends to be more volatile than SIBOR since it takes into consideration exchange rate as well.
SIBOR
SIBOR can be best understood as the interest rates that Singapore banks are willing to lend and borrow funds from one another at.
5. Floating Rate: 1-Month or 3-Month?
Be it SIBOR or SOR, most banks will allow you to choose your preferred benchmark rates to be based on either a 1-month or 3-month average.
1-month averages tend to be more volatile compared to 3-month average. Here’s a simple illustration how it works.
The table below is an illustration to explain the differences. In actuality, interest rates rarely fluctuate so much. However, you can see how the 1-month SIBOR is more sensitive to changes compared to the 3-month SIBOR.
| 1-Month SIBOR | 3-Month SIBOR | |
|---|---|---|
| January | 1% | 1% |
| February | 1% | 1% |
| March | 1% | 1% |
| April | 2% | 1.33% |
| May | 1% | 1.33% |
| June | 1% | 1.33% |
| July | 2% | 1.33% |
| August | 1% | 1.33% |
| September | 1% | 1.33% |
6. Penalty For Early Repayment
Aside from the interest rates and period of the loan mentioned above, you should also take into consideration the future plans that you have for the property that you own.
Most banks will charge a penalty for early repayment and redemption. This could be a small percentage, usually about 1.5%, of the amount that you borrowed.
Example:
You have an existing loan of $1,000,000 and decide to sell off your property during the lock- in period for the loan, you may end up paying a penalty of about $15,000.
If you have plans to sell off your home in the near future, it will be better to consider taking a loan that do not have a lock-in period, or to avoid refinancing your loan until you are assured of your future plans.
Help Is Here
To help you make better home loan decisions, we have a variety of tools at your disposal to help you find the most suitable home loan in the market.
If you are unsure of how to find the most suitable home loan, you can also connect with agents from Redbricks who can help you with any home loan related questions.