While there has been a lot of action in the financial markets recently, it may still be difficult to discern how the interest rate movements are going to affect you.
In this article, we will walk you through some of the changes you can expect to see when it comes to your home loan instalments as rates continue to stay high – chances are, you can expect to fork out higher monthly instalments.
How does this affect your mortgage loan?
As interest rates continue to remain high, home buyers and homeowners need to understand how high interest rates can affect their monthly instalments.
In essence, high interest rates will increase the cost of home loans for home buyers and homeowners. While the amount we borrow remains the same, even a slight increase in interest rates can snowball into a large difference, especially as home loans typically last for 20 to 30 years.
For example, if you take a floating-rate loan of $1,000,000 at an interest rate of 4% per annum over 30 years and the bank decides to raise its floating rate by 0.5%, your monthly repayments will go up by about S$300. That $300 adds up and over two years, you can expect to fork out $7200 for your home loan.
In June 2024, banks in Singapore reduced the rates for their fixed package to 2.85%.This is 1.25% lower than the existing floating rate.
So if you were to take up a 2-year fixed-rate package at 2.85% per annum for a loan of $1m and a 30-year tenure, you would have to fork out a monthly instalment of $4,136, $639 lower than the floating rate which works out to be $15,336 for 2 years.
To cite an instance, homeowner Mr Kevin Ong, a creative director residing in Tanjong Pagar, shared that he was offered an adjusted rate by his bank after his 3-year fixed rate loan of 1.61% ended earlier in 2022. The new rate is 30% more than what he had to pay monthly. This difference is additional monetary stress, considering the rising inflation and global recession environment we are in now.
How do you navigate through the high interest rate and inflation?
If you are servicing a recent fixed-rate home loan, there’s nothing to worry about yet. You probably still have 1-2 years left to observe and decide, depending on how long ago you took out your home loan.
If you are nearing the end of your fixed-rate home loan package, you can choose to reprice or refinance. Similarly, if you are currently servicing a floating-rate home loan, you can consider the same.
It may be wise to choose a fixed home loan for greater certainty and stability, though current fixed interest rates are about 2.85% to 3%.
On the other hand, a floating rate package may be more affordable in the near future if you think that rate hike is at its tail-end and that interest rates will start tapering.
Exercising prudent borrowing habits in the high interest rates environment
It is expected that all households will face higher borrowing costs today and should exercise prudent borrowing habits.
Taking proactive steps to manage your home loan can help you keep your finances in check.
Here are some tips:
1. Know your home loan options
Keep in mind the affordability, your financial goals and the range of options available when choosing a home loan. IQrate can help you understand your options for refinancing or improving your current home loan.
To save the most money on your mortgage, try to take advantage of financial tools like a home loan savings calculator to see how much you could potentially save by refinancing with a new one.
2. Understand the costs involved
Looking to refinance your home loan? Remember to take into consideration the legal fees and valuation costs. Some banks may offer cash rebates to partially offset these costs, but in general, you have to bear the costs of refinancing.
Also, ensure that you are out of your lock-in period and reimbursement period (if subsidy is granted initially), otherwise, you may have to bear additional fees.
3. Know your financial situation and risk appetite
As interest rates in Singapore are on the rise, it’s important to know your financial situation and risk appetite.
If you are risk-averse, banks in Singapore are also offering longer tenure packages of three years to cater to those who want more stability.
If you are someone who wants to take advantage of lower interest rates but is still concerned about the volatility of the market, you can choose to lock in for a shorter period of time.
Alternatively, if you have other sources of income besides your salary (for example, rental properties or stocks), then it might make sense for you to lock in for a longer period at a lower interest rate.
4. Create a Buffer
Many people advise building an emergency fund with six months’ worth of expenses. However, it’s recommended for those with big financial commitments such as a home loan to set aside more as a buffer, in case of further interest rate hikes or any unforeseen circumstances.
It is ideal to set aside savings in cash or liquid assets that can be used to pay for monthly home loan instalments for the next two years. In the event that you run into financial issues you will have enough time to restructure your loan or even sell your property, if necessary.
5. Make your home loan work for you
Last but not least, if you are looking to improve your cash flow, you can consider lowering your monthly instalment by extending the loan tenure.
With a longer loan tenure and smaller payment amounts, you can be prepared and build an emergency fund.
When the interest rate drops, you can review the loan tenure again, for terms more favourable to your financial situation then.
Your financial future starts with the right advice
In the ever-evolving landscape of home loans in Singapore, making informed decisions is key to securing your financial future.
Our dedicated team of expert advisors at IQrate is here to guide you every step of the way. Don’t let uncertainty hold you back; take the first step towards achieving your homeownership dreams today.
