When it comes to being a first-time homeowner here in Singapore, most of us would generally have to take out a home loan, to finance the purchase of our property. Well, unless you have very deep pockets of course.
Depending on what type of housing property you currently own, your home loan should either be through the HDB , or a local bank. Up until a couple of months ago, bank loans were generally thought of as the better option, simply because they offered generally lower interest on the loans. However, with the recent news that local banks will be upping their home loan rates, the tide has since shifted, and now bank rates are actually higher than that of the HDB’s.
So what does it mean for homeowners with a current bank loan? We break down everything you need to know, and how to navigate through this period.
Why are interest rates rising?
Unless you’ve been living under a rock this whole time, you’ll probably know that one key issue that’s been on the minds of everyone is record-high inflation and a looming recession, not just in Singapore but abroad as well. There’s implications for current and potential homebuyers, but more on that later.
In order to combat inflation from spiralling out of control, the US Federal Reserve announced a series of interest rate hikes – 3 already so far with a few more on the horizon – across the US. We won’t go into the specifics of economic theory, but in short higher interest rates would generally mean a lower purchasing power for consumers and being more expensive to borrow money. This leads to a lower demand across the market, and so stymies the effects of inflation.
Because Singapore is a small and open economy, we’re naturally very sensitive to global market movements, especially from economic giants like the US. As such, our local banks have taken the lead from the US, and increased the interest rates it charges for loans.
What are the new interest rates?
As a reference point, bear in mind that home loans by the HDB are at a fixed 2.60%. While the rate is reviewed every quarter, it’s interesting to note that this rate has not changed since 1999.
On the other hand, banks usually have different home loan packages to offer homeowners; broadly, they fall under two main categories: either a fixed rate package where its a guaranteed rate at a set lock-in period, or a floating rate package in which rates can fluctuate across terms depending on market conditions.
Just two days ago, UOB announced that it would be raising the interest on its 3-year fixed-rate home loan package to 3.08%. Its 2-year fixed rate package was also increased to 2.98%, up from 2.65% just a week ago. This makes it the highest rate across all 3 banks, at least in terms of fixed rate packages.
Image adapted from: UOB
For its floating rate packages, there is no change to UOB’s offerings. Similar to packages from other banks, the rates are pegged to the 3-mMonth Compounded Singapore Overnight Rate Average (SORA) plus a float; for UOB, it stands at 0.80% for the first 2 years and 1.00% from Year 3 onwards. As of 30 June 2022, the 3-month Compounded SORA rate is at 0.7572%.
Image adapted from: DBS
Coming in second, DBS also similarly revised its rates for its fixed rate home loans, with 2.75% across its 2 and 3-year fixed rate packages. Assuming you don’t sign a new fixed package, the loan will subsequently transit to a floating rate package, pegged at the 3M SORA + 1.50%. It also removed its exclusive 5-year fixed rate package for HDB buyers, which was at 2.05%.
While DBS’ fixed rate packages are cheaper than UOB, its floating rate packages are priced slightly higher, at least for the short term. For instance, one of its packages is pegged to the 3M SORA + 1.00% throughout the loan’s tenure, which is 0.20% higher than UOB’s package for the first two years.
DBS also offers other structures for its floating rate packages – such as those being pegged to DBS’ Fixed Deposits Home Rate 6 (FHR6) plus a float, but these tend to be more expensive.
In terms of fixed rate loans, OCBC has the lowest rates of the three, with 2.65% for a two-year fixed rate package.
Image adapted from: OCBC
What’s interesting about its floating rate packages is that unlike the other two banks, OCBC pegs its rate to the 1-Month Compounded SORA instead (0.9886% as at 30 June 2022), plus a float of 0.98% for the first two years and 1.00% thereafter.
Given this somewhat unique offering, a question that you may have is if it’s more worth it to be going for a floating package that pegs its rate to the 1-month compounded SORA (1M SORA), or the 3-month one (3M SORA). Well, it really depends on your appetite for volatility.
As the name suggests, the 1M SORA takes into account the rolling average across a month, which means that its rate will be more volatile in its fluctuation as compared to 3 months. If market conditions improve drastically within a short time span, then you would be saving more money as the 1M SORA would be able to price that in more quickly. However, the same will go both ways – if things continue to go up as they already are, then you’ll find that you’ll have to quickly adapt to higher repayments for a 1M SORA package, whereas those on a 3M SORA will ‘lag behind’.
Home loans at a glance
In a nutshell, here are the common packages being offered across the three local banks:
Overall, it’s pretty clear that bank loans are now more expensive to finance as compared to the HDBs, which hasn’t been the case for the longest time. For instance, according to reports, DBS’ rates for its 2-year and 3-year fixed rate loans were at 1.65% and 1.85% respectively, and so we’re really just in the beginning stages of this phenomenon and period of elevated interest rates.
What does it mean for homebuyers
So what does all of this mean for current and future homeowners?
If you took the opportunity to refinance your home loan during the low interest rate period in the last 2 years, then congratulations, you hit a stroke of good fortune! Personally, I refinanced my loan in late 2020 to a confirmed fixed rate of 1.50% for three years, meaning that I’ll only need to worry about interest rates in 2023.
However, if you’re set to purchase a home this year or are currently on a floating rate package with no lock-in, then you might have to spend some time assessing your finances.
For one, you might want to consider switching to a fixed rate package instead. While it is true that interest rates are at an all-time high now, locking yourself into this fixed rate – as compared to a floating rate pegged to SORA – will hedge against future interest rate hikes, which many expect will happen. This will give some semblance of stability, and so you won’t have to constantly worry about what your new revised rate will be through the months.
If you’ve yet to purchase a home but are in the market for one, it wouldn’t hurt to double check your financial health, and possibly downgrade your expectations. Apart from rising interest rates, we are after all living in a period of record-high inflation, and so it would be prudent to ensure we have a good amount of liquid cash to tide through any unforeseen circumstances.
If you can afford to wait, slide your plans for a property purchase until things cool down a bit. Else, take advantage of home loan calculators that banks provide to assess your ability to finance a home loan, and be prepared to switch up your dream home for a more affordable option.
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