Fixed or floating: how do home loan rates work in Singapore?
MoneySense describes two main kinds of bank home loan. A fixed rate does not change for the first few years, even when market rates fall, and then becomes variable. A floating rate is usually tied to a reference rate, such as SORA, the CPF Ordinary Account rate or a bank's internal board rate, and it moves up or down with that rate; banks must give you advance notice, usually 30 days, before they change it. HDB's concessionary loan is pegged at 0.1% above the CPF Ordinary Account interest rate, for HDB buyers who meet HDB's criteria. To compare packages, MoneySense points you to the effective interest rate, the repayment schedule, and the lock-in period and penalty fees in the property loan fact sheet, which the bank must give you.
Two kinds of bank rate, and HDB's loan
MoneySense describes two main types of bank home loan: fixed-rate loans, and floating or variable rate loans. HDB also offers its own concessionary loan, for HDB buyers who meet HDB's criteria. Its rate is pegged at 0.1% above the CPF Ordinary Account interest rate and is revised in line with CPF interest rates, MoneySense says. MoneySense's table of HDB and bank loans adds that the rate is reviewed quarterly.
That table is written for buyers financing an HDB flat. It lists a bank loan's interest as fixed or floating. It says a bank loan may bring fees if you repay it early, or if you refinance it while the lock-in period runs. HDB charges no penalty if you repay its loan early.
What a fixed rate does
According to MoneySense, a fixed rate does not change for the first few years of the loan. It stays the same even when market rates fall. After the fixed period, the interest becomes variable. On a bank loan, the variable rate takes over when the fixed-rate lock-in period ends, and the length of that period differs by package.
MoneySense calls the opening rate a promotional rate. It is lower than the rate for the rest of the loan. MoneySense asks you to make sure you know how much your monthly payments will rise when the promotional period ends. It also suggests reviewing your loan regularly, particularly once the lock-in is over, to see whether refinancing or repricing a home loan would save you money.
What a floating rate follows
A floating rate varies, MoneySense says. It is usually tied to a reference rate: the CPF Ordinary Account rate, the Singapore Overnight Rate Average (SORA), or a rate the bank determines itself, such as an internal board rate. If the reference rate goes up, the interest you pay goes up; if it falls, your interest falls too. The reference rate can change at any time, depending on market conditions. Banks must inform you in advance, usually 30 days, before they change the interest rate on your housing loan.
MoneySense warns that even a small rise in a floating rate can make a big difference to the total amount you pay. It also lists future rate rises on a floating-rate loan among the things to set money aside for.
What SORA is
MAS administers SORA. It defines SORA as the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singapore dollar cash market in Singapore between 8am and 6.15pm. SORA is computed from actual transactions. MAS publishes each business day's SORA by 9am the next business day, together with the 1-month, 3-month and 6-month compounded SORA.
MoneySense explains that SORA loan packages are priced on the compounded average of the daily rate over 1, 3 or 6 months. Because the rate is averaged over a period, the interest on these loans tends to be less volatile. Loans based on SIBOR and SOR worked differently: their interest was set by the rate on a single day. SORA has replaced both as the key benchmark for Singapore dollar loans. MoneySense gives 30 June 2023 as the end of SOR, and 31 December 2024 as the end of 1-month and 3-month SIBOR.
How the interest is worked out
MoneySense says the common method for home loans is monthly rest. Interest is calculated on the outstanding balance, so the interest part of each payment falls as you pay the loan down. For a monthly rest loan, the advertised rate is the same as the effective interest rate (EIR), though MoneySense adds that how often you pay can also affect the EIR. MoneySense calls the EIR the true cost of a loan.
To compare packages, MoneySense suggests asking the bank for both rates. Ask, too, for a repayment schedule that shows the total interest payable. The loan with the lowest EIR is not always the one to take, MoneySense adds. If you intend to repay early, you may take a loan with a higher EIR but no early repayment penalty.
Questions to put to the bank
MoneySense lists four things to ask a bank about its packages. How is the reference rate derived? How often may the rate be reset? Under what circumstances is the rate changed? And what special features apply, and will they be removed or amended later?
Before you sign up for a home loan, the bank must give you a property loan fact sheet. MoneySense says the fact sheet shows how possible rate rises would affect your monthly instalments. It also sets out the loan amount and tenure, the total repayment amount, the lock-in period, the interest rate and repayment schedule, a rate change illustration, the effective interest rate and the penalty fees. MoneySense notes, too, that a bank can change terms, including interest rates, fees and charges, by giving notice.