Loans

Rising Home Loan Interest Rates In Singapore

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 installments. In addition, your new monthly installments should meet the debt-to-income ratio requirements in Singapore – this means that your monthly debt obligations (monthly home loan installment + 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.