Housing Loans On The Rise – Should You Pick Fixed Or Floating Interest Rates?
Buying a new home is easily many average Singaporeans’ biggest, most “heart pain” purchase. I mean, most of us don’t just have 6-figure sums lying around, so we’re forced to empty out our cash and CPF savings and take housing loans to pay for it.
Thanks to a SIBOR crash in 2008, the private banks’ floating interest rates have been under 2% for the past decade or so. Although higher, the banks’ fixed rates averaged around 2% to 2.5%, which was still lower than the HDB housing loan interest rates (2.6%). However, with the most recent mortgage rates update (Dec 2018), the banks’ fixed rates have officially surpassed HDB’s 2.6%.
What does this mean for home buyers? Should you pick HDB or bank housing loans? If you can only go with private banks, should you opt for fixed or floating rates? Let’s find out.
What is the current HDB housing loan interest rate?
The current HDB housing loan interest rate is 2.6%, and it is pegged to our CPF Ordinary Account interest rates (+0.1%). It was the highest in the market for the past 10 years, but recently, the banks’ fixed rates have risen past 2.6%. Unlike bank fixed rates, however, HDB’s rates are super stable. The current 2.6% has not changed in 15 years!
From 2008 to Nov 2018 – when HDB’s mortgage was still the most expensive – people have complained that HDB’s interest rates were too high. But what many people don’t know is that before 2008, 2.6% was actually lower than what all the banks were offering (above 3%).
That was “normal”. After all, HDB housing loans are referred to as “concessionary rates” because they’re meant to help Singaporeans afford public housing. You have to fulfil a long list of criteria to be eligible.
The only reason why banks could offer such low rates for 10 years was because of a huge, continuous dip in the SIBOR rates in 2008. That caused bank interest rates to fall, hovering around 1% to 1.3%.
So should you take a bank or HDB housing loan?
Short answer: if you are eligible for HDB, go for it.
Those following the mortgage market would know that the local bank’s floating rates have been rising for quite some time already.
From June 2017 to June 2018, the average bank interest rates jumped from 1.3% to 1.55%, and since then, things have only gotten worse. It’s risen to about 2.16% now, and is probably going to continue going up. (More on that below.)
Fixed rates were taking a while to catch up, but as mentioned earlier, they’re back to being more expensive than HDB. Now, they’re around 2.55% (2 years) and 2.68% (3 years).
So obviously, if you’re a new home owner who’s eligible for a HDB housing loan, you shouldn’t need to think twice.
If you have an existing HDB mortgage and were thinking of refinancing with a bank, sorry to say – that ship has sailed. It’s probably wiser to stick with HDB, at least for now.
Also, do note that you only have this luxury of choice if you’re buying a HDB flat.
If you’re going private, you can only choose a bank mortgage. And if you’re choosing a bank loan, should you pick fixed or floating interest rates?
Fixed vs floating interest rates – which type of bank loan should you take?
The more popular types of mortgages offered by banks include SIBOR-pegged floating rates, fixed deposit home rates (FDHR) and fixed rates.
Let’s look at how these are likely to be affected and the forecast for the coming year to see which one may generate the most savings.
Types of floating interest rates – SIBOR vs FDHR
Floating interest rates are pegged to a separate rate, fluctuating with an index. Typically, you can choose to have your housing loan pegged to SIBOR or the fixed deposit interest rate.
If you take the current Singapore mortgage rates at face value, the banks’ floating rates are the “lowest”. But are they really?
SIBOR-pegged floating interest rates – quite transparent, but increasing
While some argue that there is no true transparency in any mortgage, pegging your mortgage to the SIBOR market index is the closest you’ll get because SIBOR rates are published.
But if you’re hoping to benefit from SIBOR dips, the reality is the dip has to last for at least 1 or 3 months for you to see any savings. Tough luck.
Typically, you can choose between 1-month (1M) and 3-month (3M) SIBOR, and although SIBOR rates change daily, banks usually use the SIBOR rate of the day of your loan disbursement or the first business day of the month. That rate is “locked in” for the next 1 or 3 months.
This means that you won’t be affected by any dip that happens if it manages to recover within that 1- or 3-month period. All that matters is the SIBOR rate of the day of “refresh”.
For instance, for Jan 2019, the banks may use the SIBOR rate for Wednesday, 2 Jan 2019. You’ll pay this rate for the next 1 or 3 months, before it’s refreshed on 1 Feb or 1 April 2019.
If you’ve done your research, you’d know that SIBOR rates are increasing as they’re already recovering from the 2008 incident. Read more about the forecasted SIBOR increase in this article.
In general, if the SIBOR trend is increasing – like now – it makes sense to pick 3M SIBOR over 1M SIBOR.
Fixed deposit home rates (FDHR) – not transparent, and also increasing
In contrast, there is little transparency with FD-linked housing loan rates (if any at all). Sure, you can check the FD rates online, but remember: the banks can change their FD rates anytime they please, and for the duration of your lock-in period, you are at their mercy.
Perhaps you’re thinking: bumping up the fixed deposit (FD) interest rates means added cost to the banks, so logically, if you link your housing loan interest rates to the fixed deposit rates, it should be quite safe hor?
Not really. Currently, there are external factors pushing FD rates up.
The bank’s current and savings accounts are “bleeding” due to attractive non-bank financial products (like the Singapore Savings Bonds and Temasek Retail Bonds, for instance). Customers are taking their cash out and parking them elsewhere for better returns.
That’s terrible news for banks who need to maintain their pool of funds. So in order to recover, banks are likely to increase their FD rates – it incentivises customers to deposit their cash with the bank, while at the same time increasing their mortgage earnings.
Fixed interest rates – how do they compare?
Fixed rates are typically much higher than floating rates, simply because you’re made to pay for the stability. However, due to the current increasing trend in floating rates, the gap is fast closing.
For example, a fixed mortgage rate now could be around 2.6%, compared to floating 2.25%. That’s only 0.35% difference, which is way below a typical gap of at least 0.7%.
At this point, you’re probably wondering: Why aren’t fixed rates rising as fast?
Well, they will. They are expected to continue going up to “overtake” floating rates.
However, this adjustment takes time. Judging from the rates now, banks have yet to fully adjust the difference.
If you can only refinance with a bank, it is a good time to “chope” the relatively low fixed rates now.
In addition to fixed and floating rates, many banks have recently started promoting board rates as well. However, despite being quite competitive, few buyers pick this option because of the lack of transparency.
The rates are entirely determined by the banks, and are not pegged to any market index (like SIBOR) or published rates.
Conclusion: Mortgage rates are rising, and you should consider refinancing to a fixed interest rate.
Nobody can tell you for sure stamp-plus-chop that you’ll save money by picking any particular package because duh, we can’t see the future. But if you currently have a floating rate and you’re ready to refinance, then you should really consider fixed rates.
Here’s an example:
Say you took a loan 2 years ago at 1.2% and your lock-in period is ending. After several rounds of increment (you’re on your 3rd year), you’re paying around 2% to 2.5%.
Just judging by a 2-year fixed interest rate of 2.5% (or even a 3-year 2.68%), you may not think it’s worth the trouble to refinance. You may not find compelling reasons to do it now, because after all, any savings in monthly repayments is not substantial.
But consider the following: Firstly, by taking 2.5% fixed, you will ultimately save on your total interest.
Secondly, during each round of increment, your effective floating rate can easily increase by 0.3% to 0.5%. So over the course of 2 or 3 years, your rate is highly likely to exceed 2.5%.
So securing a good fixed rate now can help protect you for at least the next 2 to 3 years, during which you’re likely to see significant savings because both floating and fixed rates seem to be on the rise.
Remember, your immediate savings is not the only thing to consider, and if you wait until the interest rate hike, it may be too late.
Are you thinking of refinancing to a fixed or floating housing loan? Share your thoughts with us in the comments below!