Home loan interest rates are on the rise, with Singapore banks offering three-year fixed-rate packages that are at least 1.6 percentage points higher than the 1.15% per annum rate at the end of last year. With the expectation that rates may continue to climb, what can existing homeowners and prospective buyers do?
As an experienced real estate agent, Mr. Leo Kwek, founder of AnjiaSG, answers some important questions about rising mortgage rates for your reference.
Q: I’m buying a new home this year. What should I keep in mind when looking for a suitable home loan?
A: For most of us, buying a home is the most significant financial commitment we’ll ever make, so we need to do our research and plan accordingly.
Carefully assess how much you can afford for upfront costs (including the cash outlay for the down payment, stamp duties, and legal fees) and your monthly repayments. Our local interest rates are heavily influenced by global central bank policies. Since rates have been rising, you should factor in a higher interest rate when calculating your monthly repayment amount.
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Q: Should I choose a fixed-rate or a floating-rate mortgage? Which is better in the long run?
A: This really depends on your needs. If you prefer more certainty in your mortgage repayments to manage your cash flow, a fixed-rate package would be more suitable. Conversely, if you are less sensitive to interest rate fluctuations, you might consider a floating-rate package.
Some banks also offer packages where a portion of the loan is based on a fixed rate, and the remainder is pegged to a floating rate like the Singapore Overnight Rate Average (SORA). This type of package offers flexibility to make partial prepayments when rates are high, while the fixed-rate portion protects you from further rate hikes.
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Q: I have an outstanding home loan. Is now a good time for me to refinance my mortgage? What should I consider besides the interest rate?
A: Read the contractual terms of your current loan carefully. Use a home loan calculator or speak with a mortgage specialist at AnjiaSG to analyze how much you are paying for your loan compared to others on the market—not just at today’s rates, but also by calculating the costs under different scenarios.
Familiarize yourself with your current loan’s lock-in period and whether there will be any clawback of legal fees or valuation subsidies if you refinance.
Since refinancing your mortgage can take some time, and you will be subject to a new lock-in period and any subsidy clauses, it’s a good idea to start the discussion with our mortgage specialists early.
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Q: I currently have ample savings. Is it better to use this money for investment or to pay down a portion of my mortgage early?
A: Maintaining a healthy cash flow relative to your loan obligations is always the more prudent approach. If you have surplus cash, such as from a bonus, the decision to invest it or use it to pay down your home loan will depend on many factors.
Most importantly, remember not to lose sight of your fundamental goals, such as retirement or your children’s education. This will determine your investment horizon, risk appetite, and expected returns.
Interestingly, a high-inflation environment tends to favor investments in certain asset classes, including physical assets like real estate and Real Estate Investment Trusts (REITs), as well as commodities like gold. Currently, bond yields are also at very attractive levels. It can make a lot of sense to allocate more money to your investment budget, especially if you expect to achieve returns higher than your loan’s interest rate.
If you receive a pay raise, you could consider shortening your loan tenure. This would increase your monthly mortgage payments but reduce your overall interest costs.
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