5 Practical Ways to Handle Rising Home Loan Interest Rates in 2022 – Property Blog Singapore

The United States Federal Reserve is indirectly behind home loan interest rates in Singapore. During the 2008 financial crisis and Covid-19, they set interest rates at record highs, making home loans cheaper than ever in Singapore. But from March, the period of historically low interest rates could come to an end. Here’s what you can expect and what to do about it:

No delay in rate hikes expected, despite war in Ukraine

Let’s address the first topic on many minds: Will the Russian-Ukrainian war cause the Fed to postpone planned interest rate hikes?

The response to date has been a clear no. The United States is experiencing one of its worst inflations in 40 years; and some of its economists have speculated that rising commodity prices (which can potentially result from war) could worsen inflation.

At this point, the question is not whether there will be rate hikes; it’s all about how steep the hike will be: either the usual 0.25% increases, or possibly a 0.5% “super-hiking”.

How does all of this affect Singaporeans?

As an example, consider a loan amount of $1.125 million (the maximum loan for a typical condo priced at $1.5 million).

Interest Payment Differences

At the current interest rate of approximately 1.3%, over a loan term of 25 years, monthly loan repayments are approximately $4,394. Assuming rates remain at this level throughout, interest payments would total approximately $193,301.

If we raise the interest rate to 2% – close to the pre-Covid average, in 2018 – that brought monthly repayments to around $4,768, with total interest repayments at around $305,508, if the rate persists throughout.

So even if the sting isn’t particularly painful on a monthly basis, the higher rate will make a significant difference to your overall performance, over a long period of time.

What can be done about this?

We wrote a previous article on the most obvious solution, which is to speed up the repayment of your mortgage. However, this is not a viable or prudent solution for every homeowner; and in such cases, you may instead consider the following:

  • Opt for a longer mortgage interest rate period
  • Prepare to use a semi-fixed strategy in the future
  • Research your home loan repricing options
  • Homeowners should remember to claim tax deductions
  • Apartment buyers may consider sticking with HDB for now

1. Opt for a longer interest rate period

Most bank loans are currently based on SORA; but they may be based on one-month or three-month SORA rates (some may have even longer interest rate periods, such as six or nine months, but these are rare).

calculation of sora fares
Source

The interest rate period reflects how often your home loan repayments are revised to meet the current SORA rate. So a one-month rate, for example, will have a loan repayment amount that changes every month; a three-month rate will be reviewed quarterly.

In the theory (this is not guaranteed), a longer interest rate period can save you more when rates rise. On a three-month rate, for example, you could still pay February’s interest rate after the March hike, because your loan is reset in April.

However, we must add that mortgage brokers have told us that the theory does not always work. For example, if the bank has a higher spread for a longer interest rate period, this could more than wipe out any savings.

It is best to hire an expert to compare the options; but at the very least, a longer interest rate period makes your financial planning easier. This can be useful if the wider economy becomes volatile due to the war in Ukraine.

2. Prepare to use a semi-fixed strategy in the future

Unfortunately, there are no fixed rate perpetual mortgages in Singapore. A possible solution to this is to refinance between fixed rate loans when the timing and cost are appropriate.

For example, you could take out a three-year fixed rate loan at the moment and aim to refinance into another three-year fixed rate program in 2025. The rate may increase further, as there is no guarantee that the next fixed rate loan will fixed will be cheaper – but it means you are able to lock in an acceptable rate for longer and reduce overall volatility.

This approach requires a bit of math, however, because refinancing often involves costs (eg, $2,500 to $3,000 in legal fees). You have to be careful not to cancel a savings, by refinancing too often.

This brings us to our next point, which is to…

3. Research your home loan repricing options

There are two main ways to get out of your existing home loan offer:

The first is to refinance, which means switching to a set of loans from an entirely different bank. As we mentioned in point 2, refinancing almost always entails costs; and you might find it’s not worth paying legal fees just to save double digits every month.

The second way is to reprice. It is a question of switching your loan formula to another, within the same bank. It’s considerably cheaper than refinancing, and the cost rarely exceeds $800.

reprice or refinance
Source

If the rate on your home loan gets too high, it may be cheaper to reprice a lower-rate loan with the same bank than to refinance it completely.

Some banks also offer “free reassessment” of home loan packages. This clause allows you to reprice the loan when the same bank launches a cheaper package, free of charge.

This will be done according to the terms and conditions, but do not rely on the courtesy of your bank to inform you of this. Check the terms and conditions and know what you are entitled to.

If you haven’t taken out a home loan yet, you might want to look up such options in the terms and conditions; it can serve as a tiebreaker when choosing between two banks.

4. Homeowners should remember to claim tax deductions

With property taxes and mortgage interest rates rising, homeowners could see lower returns ahead. It is therefore more important than ever for owners to claim their tax deductions.

Note that the part of interest mortgage payments can be claimed as tax deductions. For example, the monthly loan repayment on $1 million, at 1.3% for 25 years, is approximately $3,906 per month.

Of this $3,906, the interest portion is approximately $1,050 (the remainder of the loan repayment is used to repay the principal). This $1,050 can be claimed as a deduction from your property taxes.

Remember that it is up to you, as the owner, to pay attention to these details and make your complaints; don’t assume the authorities know about it and will do it for you.

5. Apartment buyers can consider sticking with HDB for now

HDB interest rates are 0.1 percent above prevailing CPF rates; and that hasn’t changed for about two decades. Unlike private bank loans, HDB loans tend to stay the same regardless of general economic conditions.

Fajar HDB 75 block design

HDB apartment buyers can use either HDB loans or bank loans, and they can feel more secure relying on HDB, with rising rates. It’s also important to add that you can refinance an HDB loan into a bank loan later, if you decide it’s worth it; but you can do the opposite (a bank loan cannot be converted into an HDB loan).

That said, some mortgage brokers and homebuyers will disagree with this assessment. That’s on the basis that bank borrowers have seen interest rates the lowest in over a decade at this point: bank mortgages have hovered at 2% or less since the 2008 financial crisis, while HDB loan rates were 2.6% throughout the crisis. .

While that’s a fair point, an HDB loan can provide greater peace of mind, with its lack of volatility. HDB is also more forgiving, in case something goes wrong and you have to pay late.

Overall, home loan interest rates are not rising so fast that borrowers will feel immediate pain; at least not yet. They are likely to dungeon however, and we remind readers that before the 2008 crisis, rates of around 4% were common for home loans.

Talk to a mortgage broker about your particular situation and whether it’s best for you to start looking for fixed rate loans early on. Drop us a note at Stacked and we can connect you with the right people. In the meantime, you can follow us for in-depth reviews of new and resale condos, and news on the Singapore property market as it progresses.


Bernadine J. Perkins