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.
If you’re currently looking to finance your new home, chances are, you already know that the HDB housing loan interest rates are steeper than that of banks, and private banks’ fixed rates are higher than their floating rates. But does this necessarily mean that HDB loans are the worst, and that the banks’ floating rates are the best?
No. In fact, with the current trend of increasing home loans, it may just be the opposite.
Why is the HDB housing loan interest rate higher than banks’?
The current HDB housing loan interest rate is 2.6%, and it is pegged to our CPF Ordinary Account interest rates (+0.1%). It’s currently the highest in the market, but it is super stable (it has not changed in 15 years).
While you may think that HDB’s interest rate is high, believe or not, before 2008, 2.6% was actually lower than what banks were offering, which were above 3% on the average.
That’s why HDB housing loans are referred to as “concessionary rates” – they’re meant to help Singaporeans afford public housing. You have to fulfil a long list of criteria to be eligible. So why is this “concessionary” rate more expensive than the private banks’ now?
It’s because of a huge, continuous dip in the SIBOR rates in 2008, which caused bank interest rates to fall, hovering around 1% to 1.3%.
So should you take a bank or HDB housing loan?
Sadly, a decade of low interest rates are over – bank’s floating rates are rising faster than you can spell “refinance”.
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 2.05% now, and is probably going to continue going up. (More on that below.)
… That 2.6% isn’t looking so bad now, huh?
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?
There are a few types of mortgages offered by banks: SIBOR-pegged floating rates, fixed deposit-linked floating rates and fixed rates. Let’s look at how they are likely to be affected and the forecast for the coming year to see which one may generate the most savings.
Floating interest rates – “lowest” in the market, but are they transparent?
If you take the current Singapore mortgage rates at face value, the banks’ floating rates are the “lowest”.
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 (FD).
But don’t let that fool you: There is no true transparency in any mortgage floating rate.
Even if SIBOR rates are published, at the end of the day, the floating rate is not transparent and dynamic (i.e. not automatically adjusted). That means you still depend on the bank to make the decision to adjust their rates when SIBOR drops.
The same is true (or worse) for FD-linked housing loan rates – the banks can change their FD rates anytime they please, and for the duration of your lock-in period, you are at their mercy.
SIBOR-pegged floating interest rates are increasing.
While you may hope and pray to benefit from the SIBOR dips, the reality is that banks rarely reduce the rates significantly for existing customers (even if they do offer attractive rates for new customers).
The dip has to be continuous and dramatic enough for the banks to react.
Plus, if you’ve done your research, you’d know that SIBOR rates are already recovering and increasing from the 2008 incident.
Fixed deposit-linked floating interest rates are increasing too.
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.
What about fixed interest rates?
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 2.4%, compared to floating 2.05%. 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?
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. Which is why it’s actually quite a good time to refinance and “chope” the relatively low fixed rates now.
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 fixed interest rate of 2.4%, you may not think it’s worth the trouble to refinance. You may not find compelling reasons to do it now, because after all, the savings in monthly repayments is not substantial.
But consider the following: Firstly, by taking 2.4% 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 2.4%.
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.
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!
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