How Is Housing Loan Interest Calculated In Singapore?
In Singapore, if you are planning to purchase a home, you can apply for a housing loan from a financial institution that will provide you with the necessary funds.
Depending on the loan tenure and the loan you take, your lender will calculate the interest rate you will have to pay accordingly.
However, before taking a housing loan, it is important to understand how is housing loan calculated so that you can make an informed decision.
This article will discuss the factors that affect mortgage rates, how mortgage interest is calculated, and the total interest you will pay.
What Is A Housing Loan In Singapore
A housing loan in Singapore is a type of loan that is given to individuals who wish to purchase a property in the country.
It is typically provided by the Housing & Development Board (HDB) and banks in Singapore and is designed to help individuals finance their home purchases.
The loan amount will depend on the individual’s income and ability to pay for the property. In Singapore, the HDB provides a loan of up to 80% of the property value, while the banks will provide up to 75%.
The bank or lender typically determines interest rates, and the loan amount will depend on the individual’s credit history.
The loan is repaid over 30 years for HDB property and 35 years for non-HDB property, with monthly payments to the lender.
The loan will also include other fees, such as legal fees, survey fees, and stamp duties, that differ amongst banks and lenders.
Factors That Affect Mortgage Rates
Mortgage rates are an important factor to consider when taking out a loan, as it affects the amount of money you will pay back over the loan term.
A variety of factors determine mortgage rates. Some of these factors include:
If the price of the property you buy is higher, you will have to borrow more from the lender. This, however, leads to lower interest rates. Lenders do this to encourage people to take out larger loans to benefit from enormous interest margins, unlike smaller loans.
Your credit score is an important factor affecting your loan’s interest rate. A higher credit score will generally result in lower interest rates, while a lower credit score will result in higher interest rates.
This is because lenders view borrowers with higher credit scores as less likely to default on their loan payments.
Type Of Interest Rate
Fixed-rate mortgages have the same rate over the entire loan term. This means that your monthly payments will remain the same, no matter how the interest rate changes.
On the other hand, adjustable-rate mortgages have an interest rate that fluctuates depending on the market conditions. This means that your monthly payments will go up or down depending on the rate.
The current market conditions can affect the mortgage rates that you get. For example, lenders generally offer lower interest to attract more borrowers if the economy is booming.
The length of the loan term can also affect the interest . Generally, shorter loan terms offer lower interest rates, while longer ones offer higher interest rates.
How Is Mortgage Interest Calculated?
The interest on a home loan is typically calculated using a fixed or floating interest rate. The fixed interest rate remains the same throughout the loan tenure, while the floating interest rate can fluctuate based on market conditions.
In Singapore, the interest rate for a home loan is typically based on the Singapore Interbank Offered Rate (SIBOR), the rate at which banks within the Asian market lend to each other. The SIBOR is determined by the Association of Banks in Singapore and is updated daily.
Here’s an example of how a mortgage of $500,000 on a 25-year tenure with a fixed 5% interest rate amortized:
|Interest/Monthly installment (%)
N/B: The monthly installments are the same throughout the loan term, given that the interest does not change.
Mortgage interest rates are calculated using the reducing balance method, which divides your payments into small monthly portions across the loan term.
Each month, the interest is calculated on the remaining balance and is deducted from the principal amount. This process repeats until the loan is fully paid off.
The interest payment for each month is calculated by multiplying the remaining loan balance with the applicable interest for that month.
The principal payment for each month is calculated by subtracting the interest payment from the total monthly installment.
How Much Interest Do You Pay?
The interest you pay on a home loan depends on several factors, including the loan amount, loan tenure, and interest rate. The longer the loan tenure, the more interest you will pay over the life of the loan. Similarly, the higher the interest, the more interest you will pay.
The best way to reduce the interest you pay is to pay large amounts of principal with each repayment. This reduces the amount of interest you pay on the remaining balance and the total amount you pay over the life of the loan.
Many lenders offer flexible repayment schemes that allow you to make additional payments, which can help reduce the interest you pay.
Always ensure that you review your home loan regularly to avail yourself of any opportunities to reduce the amount of interest you pay.
Refinancing And Repricing
Refinancing and repricing a home loan can reduce the amount of interest you pay. Refinancing means moving from your current lender to a new one offering lower interest.
On the other hand, repricing is when your current lender offers you a lower rate than before.
Both these measures can help you save on the interest you pay. Always ensure that you review your home loan regularly to avail yourself of any opportunities to reduce the amount of interest you pay.
Before refinancing, it would be best if you follow the following steps:
- Calculate the total costs associated with the loan: This includes the principal amount, processing fees, legal and documentation charges, stamp duty, etc.
- Compare the interest rates of different lenders: Compare the rates offered to get the best deal.
- Consider the loan tenure: A longer loan tenure will mean more interest payments, while a shorter tenure will mean lower interest payments.
- Compare the repayment options: Check the type of repayment options available and choose the one that suits your needs and budget.
- Get a good credit score: A good credit score will help you get better loan terms and lower interest.
By taking all these steps, you can ensure that you pay the least interest on your home loan and get the best deal.
Advantages Of Refinancing And Repricing
- Reduced interest payments: The lower interest rate will help you save on the interest you pay.
- Flexible repayment options: You can choose repayment options that suit your budget and lifestyle.
- Improved credit score: A good credit score will help you get better loan terms and lower interest rates.
- Easy access to funds: Refinancing and repricing can help you access additional funds for other investments or expenses.
- Increased savings: Refinancing and repricing can help you save more money in the long run.
- Tax benefits: You may be eligible for tax benefits when you refinance or reprice your loan.
Disadvantages Of Refinancing And Repricing
- Additional costs: Refinancing and repricing may involve additional costs such as processing fees, legal and documentation charges, stamp duty, etc.
- Prepayment penalties: Some lenders may impose prepayment penalties if you opt for refinancing or repricing.
- Negative amortization: This means that sometimes you will end up paying more than the principal amount.
What To Do If You Have Challenges In Paying Your Housing Loan
If paying your home loan becomes a challenge in Singapore, you can do a few things.
First, you should contact your lender as soon as possible and explain your situation.
If you had taken your loan from a bank, the lender could offer you a loan restructuring plan, where they will change the repayment plan to make it more affordable for you.
If it was from an HDB, you could approach the HDB for assistance or a loan restructure, and they can also advise you on alternative options that you can use, such as:
- Include one of your family members to assist you in making the payments
- Negotiate with the lender for lesser monthly payments but with a longer repayment period.
- Refinancing your loan with another lender with a lower interest rate
- If you have other liquid assets, you can use them to pay off your loan.
Since your home loan is secured against your property, you must ensure that you don’t fall behind on payments, which can lead to foreclosure.
If you default on the loan, the bank or HDB has the first charge on your property, while the CPF board has the second charge.
They can take your property and sell it off to recover their losses. To ensure that you do not default on your loan, it is important to stay informed about the current mortgage landscape in Singapore and take proactive steps to pay off your loan. This can include finding alternative sources of income or reducing your expenses.
You should also be aware of the various government schemes and grants available to help you manage your mortgage payments.
Get The Best Loan In Singapore
It is important to understand how housing loan interest is calculated in Singapore to make an informed decision when taking out a home loan.
The total interest payable on a home loan depends on the loan amount, loan tenure, and the interest rate charged by the bank.
The interest rate can be either fixed or variable. It is important to compare different banks and their loan packages before deciding.
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