Thinking of getting a housing loan? Here’s a fact to start off with: The lender you approach for a housing loan clearly understands how the interest is calculated, and you, too, should have that clarity.
Many Singaporeans seeking this information are the reason the question “how is housing loan interest calculated” is one of the most widely searched questions in Singapore.
So in this article, we seek to answer this question precisely by informing you about the factors that affect your housing loan interest rate.
We start by explaining how the mortgage interest is calculated. Next, we’ll tell you about the amount of interest you actually pay when you take out a loan, and the factors that influence your mortgage interest rate.
How Is Mortgage Interest Calculated?
In Singapore, home loan repayment is only done through loan amortisation after the ban on interest-only loans in 2009.
So when you request a loan from a bank, the bank provides you with an amortisation schedule in a table format. This structures the loan into individual payments distributed throughout the loan tenure. The payment schedule allows you and the lender to manage the mortgage loan easily every month.
The amortisation schedule is essentially a forecast, but it gives a good idea of the amount of interest and the principal that will have been paid at specific times in the future if you keep up with the monthly payments.
The interest charged at the beginning of the loan repayment period is usually high and comprises a greater proportion of the monthly repayment. But as time passes and you make more payments, the interest paid decreases over time.
How Much Interest Do You Actually Pay?
The actual interest you pay depends on the loan you have applied for.
For a HDB loan, which is only issued to HDB buyers, the interest rate is fixed at 0.1% above the interest rates of your CPF Ordinary Account (OA).
Whenever the CPF interest rates are revised, the HDB loan interest rate changes accordingly. But typically, this rate is fairly stable, which has caused the HDB loan interest rates to remain constant.
Banks offer two main types of the mortgage loans, each with a unique interest rate attached. They are:
Fixed Rate Home Loans
Fixed-rate home loans have a well, fixed rate that will not change, at least for the first few years of holding the loan. It is called the promotional rate.
Even if market rates fall, the rate remains stable. But after the predetermined fixed-rate period, the interest rate shifts and the loan transforms into a variable rate home loan.
Floating Interest Rate Home Loans
A floating or variable rate home loan has an interest rate that changes. This is in accordance to a reference rate such as that of the Singapore Interbank Offered Rate (SIBOR), CPF OA, Singapore Swap Offered Rate (SOR), or a rate that the bank itself determines, called the internal board rate.
Whenever the reference rate goes up, the interest payable also increases, and when it falls, the interest payable also falls. This exchange rate changes often as the market conditions change, but the bank cannot effect the changes immediately.
You will be informed of any upcoming changes in the interest charged at least 30 days before the change is effected.
Of the two loan interest types mentioned above, the loan packages with a fixed rate typically attract higher interest rates than floating rate ones. But they have an advantage in that the interest rate is fixed during the lock-in period and cannot change despite market movements.
In this way, you are assured that the interest paid will not go up even in the face of an economic downturn. You may be able to plan your finances well because the amount to be repaid is a definite figure.
Do also note that in general, bank mortgage rates are highly cyclical and rise and fall depending on the market changes. This means that you cannot just decide to take on a long-term loan by looking at the current interest rate.
You must also inquire about the expected market changes in the future and decide whether to take up the long-term commitment. Fortunately, with the markets being cyclical, there’s a way to forecast what’s to come, which is by studying the past.
Factors That Affect Mortgage Rates
Mortgage interest rates fluctuate by several percentage points depending on various factors. This fluctuation may result in a substantial rise or drop in the amount you repay monthly.
So, you need to know “how is housing loan interest calculated” because then, you will become more aware of what banks expect and adjust to it. This may improve your chance of landing a favourable housing loan interest rate.
Here are some critical factors that affect the mortgage rate:
Your Credit Score
Your credit score, which is an aggregate of your credit history, indicates your creditworthiness and reliability in paying back your debts.
The lender reviews your financial history, which includes your history of loan inquiries, previous loans, credit card payments, and late payments. Those with high credit scores get lower rates than borrowers with low credit scores.
So before searching for a suitable mortgage loan, take a step back to examine your credit report. If you find any errors, dispute them because they could lower your credit score and keep you from qualifying for some good loan rates and credit terms.
Correcting credit errors may take some time to resolve, so start the process before you start inquiring about mortgage loans.
Price Of The Property And Loan Amount
The appraised value of the home you’re buying determines the loan size and the attached interest rate.
If you’re asking for a small loan, you may have to pay a high interest, and if the loan is large, the attached interest rate is small.
But although large mortgage loans often have lower interest rates, the interest amount paid in the long run is quite significant.
The time it takes to repay a loan goes hand-in-hand with the interest rate offered.
A short-term mortgage gets a lower interest rate because you will pay the principal balance much quicker than a long-term mortgage. With a longer-term mortgage, the lender risks your defaulting and charges a higher interest rate.
When you place a large downpayment, lenders see that you have significant equity in the property, which means that the risk of default is considerably low. So a significant downpayment will get you a lower interest rate.
Another fact to remember is that the downpayment influences the overall cost of the mortgage loan. The larger your downpayment, the lower your overall borrowing costs.
So do strive to get a lower interest rate that will allow you to save some money overall.
Also note that costs are directly proportional to the downpayment placed. Even if you make a small downpayment and surprisingly end up with a relatively low interest rate, the total cost of your borrowing will likely be greater.
This is because you would likely be asked to take up private mortgage insurance, which will add to your monthly payments towards the mortgage. Therefore, it’s best to place a large downpayment, have a low interest rate, and not have to take up an insurance package.
Get Favourable Housing Interest In Singapore
Now that you have a clear idea of how is housing loan interest calculated, you can start looking for the right housing loan and lender.
While many banks, licensed money lenders, and other financial institutions across Singapore are willing to offer you a housing loan, Credit 21 stands out as the licensed money lender with some of the best credit terms, lenient terms, low interest rates, and good credit customer service.
We have worked with many customers over the years and helped them get financial support for their needs. Now, we are eager to work with you too.