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Rising Interest Rates and How They Affect Your Housing Loan




Changing Times


Towards the end of 2022, interest rates across the world have gone up considerably, with U.S. banks pumping interest up to as high as 9.1%. Even across the world, Singaporeans are feeling the effects of this, with inflation hitting 13-year highs , rising by 4.4%.


As Singapore is an open economy, governed and entered largely by exchange rates, the interest rates in Singapore are volatile, being determined by global interest rates such as the United States Federal Reserve.


These changes are inevitable and the effects are apparent - especially for those taking large or long term loans - having interest rates that double or triple in size could mean that your monthly payments can easily shoot through the roof compared to what you initially expected.



Interest Rates Now


For example, prior to march last year, Singaporeans have been familiar with what might be a generic and modest 1.5% PA home loan package, fixed to 2 years. Today, the same package holds an interest of about 4.25%. To put things into perspective, let’s have a look at what this “few percent increase in interest rate” actually means for those that are looking to take up a loan today.


When home loan rates increase, the loans become more expensive. This is especially true since home loans are large, and can sometimes take 20-30 years to pay off. An increase in a few percentage points can snowball your total interest payment into a reality shaking, scary number.


Taking an example of a $1.35 million home, since the effective loan value would stand at $1m (after paying the 25% cash).


Following a simple mortgage rate calculation factoring in compound interest, we break down 2 scenarios, one being a 1.5% interest rate that most Singaporeans are used to, and 4%, which is the new baseline in the current interest rate environment.


Just a few years back when the interest rate was about 1.5%, this is what you are looking at in regards to the amount of interest you have to pay for your housing loan:

Monthly payment with interest : $3,572

Total interest amount over loan duration: $286,076 (over 30 years)


With the current 4% PA, this is the new calculated compound interest rate:

Monthly payment with interest: $4,774

Total interest amount over loan duration: $718,695 (over 30 years)


This means that if you were to take the same type of loan (same amount over the same timeframe), a 2.5% increase in interest rate would result in you are paying 2.5x more in interest at the end of the day, or in this specific case of a $1M loan, $432,619 - about enough to finance another 3 room HDB flat by itself!


This rising interest rate also affects homeowners who bought homes when interest rates were low. They could be vulnerable as their disposable income might not be enough to cover the hike in monthly mortgage payments.

Here are a few ways to minimise the magnitude of the high interest rate environment on your property purchase:

  • Refinancing your home loans: If you currently hold a fixed-rate home loan with a high-interest rate, you might want to explore the possibility of refinancing to a new loan that comes with a lower interest rate. Ultimately, this step could prove beneficial in reducing your monthly mortgage obligations and leading to potential savings.

  • Partial prepayments: Make a lump sum payment to your financial institution, thereby decreasing the overall amount of your mortgage loan. This strategy will result in reduced interest payments over time. Certain financial entities even permit prepayments of up to 50% without imposing any penalties.

  • Opt for cash payments: Consider the alternative of making upfront payments for your purchases, as opposed to incurring debt. This approach can effectively spare you from having to pay any interest charges at all.

  • Initiate negotiations for decreased interest rates with your loan providers. Be ready to explore various options and assess interest rates from a variety of lenders.

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