When applying for a home loan in Singapore, how is the mortgage interest calculated?
Understanding how home loan interest is calculated is crucial. Firstly, the mortgage interest rate will affect your monthly repayment amount, which relates to your affordability. Secondly, the interest rate will impact the total interest you need to pay over the loan period, which is your total cost of borrowing.
In this article, we will explore the key factors in calculating a Singapore home loan:
- What is home loan interest?
- How is home loan interest calculated?
- How much interest will you need to pay?
- Factors affecting home loan interest rates
Table of Contents
What is Home Loan Interest?
Home loan interest is the fee a bank charges for lending you money. It is the cost of borrowing to buy a home.
How is Singapore Home Loan Interest Calculated?
Home loan interest can be either fixed or floating (variable).
A fixed interest rate does not change for a specific period. A floating interest rate, however, can change depending on various factors.
Fixed interest is known in advance, while floating interest is periodically communicated by the bank. With a fixed-interest home loan, you know exactly how much you need to pay each month.
Banks that offer floating rates use the reducing balance method to calculate the monthly repayment.
In Singapore, banks use loan amortization to calculate a home loan repayment schedule, which will show the following:
- Equated Monthly Installment (EMI)
- Monthly interest
- Monthly principal repaid
- Total cost of the loan
When you first start repaying your loan, a large portion of the payment will go towards paying the interest. Therefore, it is very important to understand how home loan interest is calculated. This will help you make more informed decisions.
The best way to calculate home loan interest is to use a mortgage calculator. A mortgage calculator can easily determine the impact of interest on your home loan. Let’s assume you’ve taken out a S$700,000 home loan with a 30-year tenure and an interest rate of 4%.
Your loan repayment schedule will be amortized as follows:
| Year | Principal Repaid | Interest Repaid | Outstanding Balance |
| 2023 | $12,327 | $27,776 | $687,673 |
| 2024 | $12,829 | $27,273 | $674,843 |
| 2025 | $13,352 | $26,751 | $661,491 |
To calculate the home loan interest, the bank multiplies the loan amount by the interest rate and the number of years. This resulting figure is then divided by the number of months (in the loan tenure) to get the Equated Monthly Installment (EMI). The EMI is the amount you need to repay each month (what we commonly call the “monthly payment”).
If the interest rate remains constant, your monthly repayment will stay the same. As you can see from the table above, the interest amount in the first year is higher than in subsequent years. Over time, the amount of interest paid will gradually decrease.
How Much Interest Will You Need to Pay?
Home loan interest is usually one of the biggest costs associated with buying a home. The amount of interest you pay depends on several factors, including the type of mortgage, the loan amount, the loan tenure, and the interest rate.
Here is a detailed explanation of how these factors affect the actual interest you will pay.
Mortgage Type
Your mortgage will either be fixed-rate or floating-rate.
A fixed-rate mortgage has an interest rate that remains unchanged for a certain period. Banks will offer a fixed rate for an initial period to encourage borrowers to take up their products. A fixed-rate mortgage means the EMI remains constant for that period.
On the other hand, if you choose a floating rate, the EMI depends on market interest rates (linked to the SORA rate). The main advantage of a floating rate is that you pay less on your mortgage when interest rates go down.
Loan Amount
The higher the loan amount, the more interest you will have to pay. To reduce the potential interest you might pay, consider making a larger down payment. This will reduce the amount you need to borrow and the interest the bank charges you.
Loan Tenure
A longer loan tenure increases the amount of interest you will have to pay. Choosing the shortest possible loan tenure can reduce your overall interest expenses.
A shorter loan tenure will require you to pay a higher EMI, but the overall cost of the loan will be lower in the long run.
Mortgage Interest Rate
The higher the interest rate, the more expensive the mortgage will be, and you will pay more interest in the long run.
Factors Affecting Home Loan Interest Rates
The mortgage interest rate is an important factor to consider when buying a home. After all, your mortgage rate will directly affect your monthly repayments.
We will take a closer look at each factor and how it affects mortgage rates. By doing so, you can have a better chance of securing a more favorable mortgage rate. Here are the factors that determine the mortgage rate offered by a bank:
Credit Score
Your credit score gives the bank an idea of your debt situation. A lower credit score may trigger a higher mortgage interest rate, as the bank will view you as a higher-risk borrower. Therefore, it is important to strive for a higher credit score.
You can obtain your personal credit report from the Credit Bureau Singapore to see what you need to do before applying for a home loan.
Loan Amount
The amount of money you borrow can determine your mortgage rate. Some lenders may charge higher interest rates for smaller loan amounts.
Conversely, a larger loan may have the opportunity to secure a lower interest rate. It is crucial to confirm how your borrowing amount affects the interest rate.
Loan Tenure
A shorter loan tenure may secure a lower interest rate because the bank views you as a less risky borrower.
You can inquire with the bank about loan tenures and interest rates, compare different loan terms, and choose a mortgage package that fits your budget.
Interest Rate Type
Interest rates can be fixed or floating. A fixed rate remains unchanged for a period. A floating rate changes over time.
In Singapore, mortgage rates have gradually moved away from referencing the Singapore Interbank Offered Rate (SIBOR) to the Singapore Overnight Rate Average (SORA).
Most banks in Singapore offer 1-month compounded SORA (1M SORA) and 3-month compounded SORA (3M SORA) mortgage packages. The difference lies in how often your mortgage rate is updated. Therefore, depending on whether you choose the 1-month or 3-month compounded rate, the interest you pay will fluctuate monthly or quarterly.
You can find the reference rates on the website of the Monetary Authority of Singapore (MAS).
We expect interest rates to generally trend upwards. This means both fixed and floating rates are likely to rise. We do not anticipate a decrease in rates, so it is better to opt for a fixed-rate mortgage.
The Bottom Line
It is very important for borrowers to understand how home loan interest is calculated. You can increase your chances of getting a better mortgage rate.
By improving your credit score and choosing the right loan tenure and interest type, you will get a mortgage that meets your needs.
You might consider making a higher down payment, as this will reduce your borrowing amount and the overall cost of the loan.
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