Not too long ago, we wrote about how banks had adjusted their home loan rates in light of the changing economic climate, so much so that all the current loan rates being offered were higher than that of the HDB’s 2.6%.
Well, just like the present economic situation, that information got old, pretty fast. Just last week, the major local banks DBS, OCBC and UOB further raised their interest rates for their home loan packages, meaning that mortgage rates now are more or less at an all-time high, since the early 2000s.
What are the new interest rates?
Before we dissect the new home loan packages, here’s a quick refresher on the key things you need to know about home loans in Singapore.
Depending on the type of property you are purchasing, you are eligible for various types of loans. If you’re buying a HDB, you the option to choose between taking a loan from HDB or a private financial institution like a bank.
Image credit: @singaporelandedhouse
On the other hand, if you’re buying an EC or private property, then you can only finance your home with a loan from a bank. For HDB loans, the prevailing interest rate has been a standard 2.6% for the longest time – since 1999 in fact – and is confirmed to be unchanged at least until the end of 2022.
For banks, there are two main categories of loans that you can apply for. The first is a fixed rate package, in which you’re locked in for a contracted period where your interest rate won’t change. The other is a floating rate package, which often involves a set component plus an additional floating component which fluctuates depending on marketing conditions.
More recently, some local banks have also offered a hybrid package, in which part of your loan amount is subject to a fixed rate, while the remaining amount is subject to a floating rate.
As of 10th October, DBS is offering a flat 3.50% for all of its fixed-rate packages, with options for either a 2, 3, 4 or 5-year period. The minimum amount you have to loan is S$100,000, and the rates after your commitment period will be pegged to the 3-month SORA (Singapore Overnight Rate Average) + 1.00% p.a. For reference, the current 3M SORA is 2.1820% p.a. at the time of writing.
As for its floating rate packages, DBS has two types available, both of which have an initial 2-year commitment period: one that is pegged to the 3M SORA, and the other to the Fixed Deposits Home Rate 6 (FHR6). The current FHR6 as of 10th October 2022 is 1.40%.
The 3M SORA package’s interest rate is 3M SORA + 1.00% p.a., and this formula will be unchanged after your initial commitment period. For the FHR6 package, you can choose to either go for a 2 year lock-in period (pegged at FHR6 + 1.30% p.a.) or for a no lock-in period package where it will be FHR6 + 1.75%.
Interestingly, DBS also rolled out an additional floating rate package targeted at low-income families; in order to be eligible, the average monthly income of all borrowers has to be under $2,500. This package has a 2-year commitment period, and the rates are the current CPF Home Rate (CHR) of 2.50% plus an additional 0.10%. So essentially, this loan will have a mortgage rate of 2.60%, which is similar to the current HDB loan rate.
DBS is one bank offering the aforementioned hybrid package.
Image adapted from: DBS
You can choose one of 3 options, in which the percentage of your loan amount across fixed and floating rates varies. For the fixed rate component, the rate is pegged at 3.50%, with the same 3M SORA + 1.00% after the initial commitment periods.
Interestingly, while OCBC does offer fixed-rate loans, this is not advertised on their website. According to reports, they have a simple, no-frills, 2-year fixed rate loan of 3.50%, similar to that of DBS. They also have a shorter 1-year fixed loan package at 3.35%; as far as we can tell, they are the only bank to offer a 1-year loan product.
Image adapted from: OCBC
As for its floating rate packages, OCBC’s product offerings are largely unchanged from last time, where homeowners can choose to either have their loans tied to the 1M or 3M Compounded SORA, with an additional 0.98% for the first 2 years and 1.00% thereafter.
Based on the MAS’ website, the prevailing 1M Compounded SORA is 2.6959%, while the 3M Compounded SORA is at 2.1820% as of time of writing.
From our checks, it seems that OCBC is the only bank to use the 1M SORA as a benchmark for its loan packages. Of course, this comes with pros and cons. On one hand, the 1M is more volatile as compared to the 3M one, so if the economic conditions improve then you’ll get to ‘save’ on those 2 months, whereas the 3M will essentially take a longer time to reflect the change in interest rates.
In terms of fixed-rate packages, UOB’s products are the most expensive of the three local banks. They offer either a 2-year or 3-year package, with interest rates of 3.75% and 3.85%, respectively. Similar to OCBC, this is not explicitly highlighted on the website, and you’ll have to complete a Contact Us form where a specialist will be in touch.
For floating rate packages, UOB might just be one of the cheaper packages out there. On its website, UOB is offering a promotion for its 3M SORA Home Loan Package, where rates are calculated based on the 3M SORA + 0.70% for the first 2 years, 0.80% for the third year, and 1.00% thereafter. However, the minimum loan amount is a hefty $500,000, and so those who are looking to borrow less than that will have to look elsewhere.
Interestingly, it seems that UOB is also offering hybrid packages, where people can choose to finance their loan through a mix of fixed and floating rates. Just like its fixed rate packages, you’ll have to complete a Contact Us form where a specialist from the bank will follow up with you.
What do the higher interest rates mean for home-buyers?
As you’ve probably heard through the news, what is happening in the property market right now is nothing short of extraordinary. Interest rates are at an all-time high, in tandem with the rising interest prices. There is no doubt that it is becoming increasingly expensive to own a property here in Singapore.
Depending on your eligibility for a HDB loan, the natural choice at this juncture would be to go for a HDB loan, since it more or less has the lowest rates at 2.60%.
However, if you’re unable to borrow from the HDB for whatever reason, then you’ll have to borrow from a bank. In doing so, the aim here would be to minimise your loan amount, and so you’d want to pay as much as possible upfront so as to lower the loan quantum.
Which loan type is the best for you?
Next comes the question of fixed, floating, or hybrid? In short, there really isn’t a one size fits all solution. For fixed rates, the draw is that you’re locking in your interest rates for the immediate future, and this would protect you from any future rate hikes, which many speculate will happen once the US Federal Reserve does so in the coming months.
Of course, no one can accurately predict what will happen in the market, and so there is that possibility that things will reverse and interest rates go down; in that instance, you’re still locked in to a higher interest rate.
As for floating packages, you will have to ride the waves, so to speak. Depending on the market conditions, you’ll just have to be prepared to pay both higher or lower installments. While some might be able to stomach that, others may not necessarily like to do so, and would rather have some form of certainty in their finances.
As such, our best recommendation at this stage would be to go for a hybrid package, if possible. The benefits of doing so is that you have a fixed rate component, which will hedge against any future rate hikes, and so you’ll have a portion of your loan quantum protected. And if the market reverses and rates go down, the floating component will hedge against the lower interest rates which you’ll enjoy.
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Cover image adapted from : @singaporelandedhouse
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