This post provides some pointers when picking a mortgage during a low rate of interest climate, particularly in Singapore.
Prevailing Interest Rate Environment
Be aware of the prevailing rate of interest situation. During a low rate of interest environment, a bank loan will usually offer lower interest when compared with the HDB concessionary loan.
For example, last year when interest rate in Singapore dropped to an all-time low, some borrowers of banks home loans enjoyed rates of less than 1% per annum (p.a.). In contrast, the rate on the HDB loan stayed at 2.6% p.a..
However, for a bank loan, there are many kinds. So which should you select for highline residences?
A fixed-rate bank loan in Singapore has its interest rate remaining unchanged for the first 3 to 5 years; after which the rate will be pegged at a reduction below the financing institution’s board rate or floating rate.
During a low-interest rate environment, a variable-rate loan typically has lower interest rates relative to your fixed-rate loan. It is because SIBOR or SOR is depressed.
Hence, as a rule of thumb, go for a variable-rate loan during a low-interest rate climate if you’re searching for interest-economy. However, there maybe other concerns in choosing a mortgage loan.
A varying-rate loan is sold with more uncertainty in the monthly repayment sum. This may not be ideal for individuals who want stability in their own monthly monetary outlays. In such cases, a fixed-rate loan or a HDB loan maybe more appropriate; as the former provides the same rate during the fixed interval. For the latter rates have stayed constant for over a decade.
Yet, uncertainty in monthly repayment sum for HDB loans remains potential. For example, in the 1990s its rates presented more unpredictability (Source: CPF, “Historical HDB Concessionary Interest Rate”).
Besides monthly repayment instability, another drawback of a variable-rate loan is the chance of an interest rate spike when interest rates begin to swing upwards. When this occurs, the rates on a variable-rate loan can surpass a fixed-rate loan.
Conversely, you are able to select a variable loan with an interest rate cap, but there is a catch. The spread on these loans are higher than for ordinary variable-rate loans.
The other interest-rate cap loan available on the market is the DBS Mortgage Rate Protector, which spread stands at 1.15% or 1.25% with a DBS Mortgage Insurance.
Ultimately, whether a variable rate loan is for you will depend on how savvy a borrower you are (for instance you are able to time the variable-rate loan such that your are from the lock-in period when rates increase, so you can refinance to a more affordable loan), your risk profile, and whether the benefit of interest-economies outweigh the instability in monthly installment.
The guidelines provided in this post should not be substituted for professional guidance. Do talk to a professional mortgage adviser if you’re planning to take a fresh loan or refinance. Singapore’s mortgage consultancy usually will not charge for home loan guidance.