This year, home owners will have to pay high mortgage repayments because interest rates are expected to rise. In Singapore, since 2008, property loans have hit at record low. During the Global Financial Crisis, a series of economic efforts from the United States pull down the interest rates.
Nonetheless, there are clear indications that this era of global down turn have ended. Home Loans: Fixed Rate Vs Floating Rate If a Singaporean wants to get a loan from a bank instead of HDB Concessionary Loan, when they are purchasing private housing – which includes Executive Condominiums – he/she has two options: fixed rate lone and floating rate loan. In fixed rate home loans, the amount for monthly installments does not alter for the entire period of loan, which is usually between 3-5 years.
This type of loan is costly than the floating rate loan because the bank is always trying to protect itself from possible rate hikes. Usually, the floating rate loan is based on the Singapore Interbank Offered Rate (SIBOR).
The SIBOR follows the interest rates effective on the local banks and changes regularly. The home loan interest rate will move with the rising and falling of SIBOR.
In Singapore, there is no such thing as everlasting fixed rate home loan. When the fixed rate period ends, all loan packages ultimately slip back to floating rates. Fixed rates loans, the closest Singaporeans can get to, are available to the Singaporeans who are buying HDB properties (not Executive Condominiums).
A special mortgage, which offers perpetual fixed rates, from a private or a foreign bank, is not open to many Singaporeans. Why do you want to get a fixed rate loan ? Since the banks are expecting a chain of rate hikes, packages of fixed rate loans are now being pulled down. If you want to understand how the banks pulling fixed rate loans from the market affects you, you must know how interest rate on home loan is calculated.
The interest rate in a common floating rate home loan is calculated in the following method: • Year 1: 3 Months SIBOR + 0.7 • Year 2: 3 Months SIBOR + 0.7 • Year 3: 3 Months SIBOR + 0.7 • Year 4 and thereafter: 3 Month SIBOR + 1.0 Note: The “3 months” signifies the interest rate period.
In order to match the prevailing SIBOR rate, it takes this long for the interest rate to be revised. Repayment amounts changes every month in one month SIBOR rate, however, repayment amounts will change in six months in a 6 month SIBOR rate. As for now, the 3 month SIBOR rate is at 0.96 per cent. For the first three years, the interest rate is around 1.66 percent (0.96 + 0.7), and from the fourth year until the loan tenure ends, it will be around 1.96 percent.
The hike in the SIBOR rate will pose a serious financial burden on borrowers. This issue can be mitigated through fixed rate home loans because fixed rate loans, during the period of 3-5 years, will not fluctuate, the interest rate is always a fixed amount (for instance X% per year). However, with fixed rate loan you will have to pay back more money.
The demand for fixed rate home loans could increase because of current market scenario. As mentioned, home loan rates are directly rely on SIBOR.
On the other hand, the SIBOR rate is indirectly depended on the economical state of the United States. Since the economy is recovering, the American Federal Reserve is hiking its interest rates. Three planned rate hikes are expected for 2017 and Nomura has predicted SIBOR to hit 1.35 percent by Second Quarter of 2017, and 1.6 percent by fourth quarter. Since many banks have “fourth year and thereafter” rates of 0.9 to 1.2 percent, it is estimated that this will equalize interest rates for private homes with the HDB loan.
Since 2008, loans from private banks have been cheaper compared to HDB loan, which has prompted many HDB borrowers to refinance their property through the bank loans. In order to be secured for the forth coming 3-5 years, borrowers are likely to be interested in taking good fixed rate loan options available in the market and The Scott Towers are best to invest from your loan options. Home owners, no need to panic or overreact The hike in the interest rate may not force thousands of home owners to sell their property as naysayers are likely to claim.
Assuming that you have a loan for $800,000, for the period of 25 years, with 1.8 percent per year interest, you will incur just about $3,133 monthly repayments. In case the interest rate on your loan rises extensively, lets say 2.6 percent of the HDB level, your monthly repayments would be $3,629 and another best option for the loan is The Scott Towers
It is true that paying $496 extra every month is a financial burden, however, the amount is so small that it will not force the burrower to downsizing or become homeless.
The rising interest rates will trouble landlords more, mostly in softening rental market in Singapore, because you cannot increase your rents to accommodate $496 that you are paying every month. In this scenario, more than home owners, landlords must refinance their property with fixed rates.