If you’re planning to purchase your home in Singapore, then you might have considered getting a home loan to finance the purchase. But before you settle in on a loan, it is advisable to understand how the mortgage interest is calculated.
In this post, we’ll break down the basics of how is housing loan interest calculated and the factors that affect your mortgage rates.
Banks in Singapore use the amortisation of a loan to calculate your mortgage interest.
Amortisation is the process of paying off your housing loan through regular. Each instalment is paid monthly and consists of the interest and principal.
If you borrow from a bank, your lender will help you understand how amortisation works through a table that details how you will make payments throughout the loan tenure.
To ensure the loan is fully repaid, the first years of your loan tenure will be focused on repaying the interest, while the later years will focus more on paying off the principal.
Mortgage interest is calculated based on your outstanding loan balance and the interest rate. There are two types of loans in Singapore; the Fixed-rate and floating rate.
Fixed-rate means the interest is constant while the floating rate fluctuates based on the market conditions.
The first years of your loan are regarded as the ‘lock-in’ years, usually lasting between two to five years. Here, the rates are fixed. This means interest repayment will be the major constituent of your instalment. Once the lock-in period is over, the interest will reduce and be converted to floating rate.
So how is housing loan interest calculated? Well, the interest will be calculated via the reducing balance method, which calculates interest based on the outstanding loan balance. The balance and interest will reduce as you continue to pay the loan.
It’s good to note that amortisation is only a prediction, not the final figure. But it does give you an idea of what to expect and helps you to plan for the loan payments.
If you need more help understanding amortisation, please get in touch with one of our experts at Katong Credit.
That said, here are some of the intricacies to keep in mind about mortgage rates:
If, for example, you wish to purchase a home that is still under construction, you cannot apply for a fixed rate; you can only get floating rates.
The same applies to HDB and private property under construction. Once the construction is done, consider getting a fixed rate for your home loan package.
On the other hand, if you choose to get a completed HDB or a private property, you can get fixed or floating rates.
In addition, fixed rates do not remain ‘fixed’ forever. They can and will be changed based on market conditions. They will also be changed to floating rates after the lock-in period of your loan.
As we mentioned, your interest rate will be fixed during the lock-in period. However, once this period is over, they will be changed to floating rates.
Unfortunately, since your bank’s primary interest is to make a profit, it may ‘not remember’ to inform you about the change. So, rather than be caught unaware, be vigilant, monitor your loan terms, and seek professional advice.
The actual interest you’ll pay depends on several factors, such as the loan type, loan amount, interest rate, and loan tenure.
1. HDB Loan
If you take a HDB loan, you’ll pay a flat rate of 2.6%. This rate has remained unchanged since 2003 and is often considered a fixed rate.
This rate is set at 0.1% above the current CPF rate, so should the CPF rate change, the HDB rate will also change.
So to determine how is housing loan interest calculated and much interest you’ll pay with a HDB loan, consider this example.
Suppose you take out a HDB loan for $500,000 with a fixed rate of 2.6% for a loan tenure of 25 years.
Your monthly instalments will be $2,268.35, and the total interest at the end of the tenure will be $180,504.26.
2. Bank Loan
Bank loan interest rates are floating rates for the more significant part. Even though the rates for your housing loan will be fixed for the first few years, your lender will convert the rates to floating for the remainder of the loan tenure.
As such, it is difficult to determine the exact amount of interest rate you’ll pay at the end of the loan. However, as said earlier, the amortisation of the loan can give you an estimate of the amount so you know what to expect.
Nevertheless, your interest payment will be high in the first years, while the principal payment will be low. In the following years, the interest will reduce and the principal amount will increase.
This variation helps to ensure you can afford to repay the loan monthly.
It is important to note that making larger monthly payments or paying off your loan early can significantly reduce the amount of interest you will pay over the life of the loan.
You can also use an online mortgage calculator to estimate the total interest you’ll repay at the end of your desired loan tenure. You can use varying rates, loan amounts, and loan tenures to find what works for you.
Lastly on how is housing loan interest calculated, your home loan rates can fluctuate based on some factors such as the market condition. Other factors include:
The market value of your home will determine your loan amount.
Your lender will then use the loan amount to determine the interest rates to offer you.
In mortgages, banks offer a lower interest rate for large loan amounts, while high interest rates are charged on small loan amounts.
By now, you understand the two types of mortgage rates; fixed and floating.
While your rates may start as fixed, they will auto-convert to floating after a few years. These floating rates will vary between high and low throughout your loan tenure.
Therefore, consider how each type will affect your financial status in the long term before choosing your preferred one.
You want to ensure even if the rates go up; you’ll still be able to maintain your monthly loan payment and remain financially safe.
Your lender will serve you a high interest rate if you choose long loan tenure.
This is because your monthly instalment will be low, as will the amount repaid on the principal balance. Therefore, to minimise the risk of default, your lender will charge a higher interest rate.
On the other hand, if you choose a short tenure, your interest rates will be low. However, the monthly instalment will be high, and the large amount will be used to repay the principal loan balance.
With long loan tenure, you can manage your finances better, but the total interest you will repay will be high. With short loan tenure, while the rates are low, the high instalments can be challenging on your monthly budget.
Finally, your credit score will influence your loan amount and your lender’s interest rate.
Your credit score shows your creditworthiness and reliability. It shows how you have dealt with past loans. Have you repaid them? Did you default or delay repaying?
You may be regarded as a low-risk borrower if you have consistently repaid your past loan without fail allowing you to qualify for low interest rates.
However, if you have cases of default and over-borrowing, your credit rating will be low. Since you are viewed as a high-risk borrower, your interest rate will be high.
If your rating is low, try to improve it before taking a home loan. You can resolve any issue with past lenders and repay any outstanding loan.
Taking out a mortgage loan is a good idea when you want to purchase your home. However, before you dive into borrowing, it is best to learn how is housing loan interest calculated, the types of rate and any factor that can affect your rates.
All this information will help you make better and informed decision about the loan and plan your finances to accommodate the loan repayment.
If you’re in need of financial assistance, apply for a loan with Katong Credit, your number one licensed moneylender in Singapore.
It’s easy, just submit your application, wait for a response within 24 hours, if your application is approved, come to our offices for face-to-face verification, and get your funds immediately after.