How Is Housing Loan Interest Calculated In Singapore?

Worldwide, houses are big-ticket items – they’re the biggest assets that most people will ever purchase. It typically takes 10 to 30 years to repay a home mortgage.

That’s why, if you’re applying for a mortgage, it’s important to know how the interest is calculated in Singapore.

Lenders use different criteria to qualify mortgage borrowers, and so does the interest. They might start with your property value, but they will also have questions about your income stability, your investments, and even your past credit history.

Understanding how the interest of the mortgage loan you’re about to take will be calculated will help you make better decisions before and after applying for one.

And since there is a lot of information out there that might confuse you, we considered putting together this guide to get you started.

Discover the types of home loans, how mortgage interest is calculated, how much interest you actually pay, and factors that affect mortgage rates.

Types Of Home Loans Available in Singapore

There are two main types of home loans offered by banks in Singapore:

1. Fixed-Rate Loans

The interest rate is fixed and will not change for the first few years or even if the market rates fall but become variable after the elapse of the fixed rate period.

2. Floating Or Variable-Rate Loans

The interest rate of this loan type varies and is usually tied to a reference rate e.g. CPF Ordinary Account, Singapore Interbank Offered Rate (SIBOR), Singapore Swap Offered Rate (SOR), or a rate determined by the bank where if the reference rate goes up, the interest payable will increase and vice versa.

This takes us to the next point.

How Much Interest Do You Actually Pay?

How much interest you pay for any of the loan types above depends on the interest rate you receive, whether it’s a variable or fixed rate, and how long it’ll take you to repay the loan as agreed upon with HDB, private lenders, or banks.

Sometimes it is possible to refinance or move before the end of the loan’s term, but the most common way you can find your loan’s monthly interest payment breakdown is by reviewing your loan’s amortisation table or schedule.

For how is the housing loan interest calculated in Singapore, read on.

How Is Mortgage Interest Calculated?

In Singapore, the housing loan interest is determined using the loan amortisation model. This is a reducing balance model that spreads the total loan amount (principal) plus interest across months in the entire loan tenure in a series of fixed payments.

What it does is break your monthly loan repayment into packages that tend to decrease the interest as the loan tenure comes to an end while the principal payment increases.

Let’s put this into perspective.

Say that you take out a $200,000, 30-year fixed-rate mortgage with a 4.25% annual interest rate. Your first mortgage payment becomes $984 and then your monthly interest rate would then be around 0.354%, which is 4.25% divided by 12 months.

Your interest payment will be $708, which is derived by taking into account $200,000 by the monthly interest rate of 0.00354.

The remainder ($276) goes toward your principal, which leaves you with a loan balance of $199,724, which is $200,000 – $276 (your principal).

So since this is a fixed-rate mortgage, you can then multiply the remaining balance by the monthly interest rate to figure out how much of your second payment will go toward interest ($199,724 x 0.00354 = $707) and repeat the process to complete your loan amortisation schedule which is 360 payments (12 payments a year for 30 years) needed to pay off your mortgage.

The loan amortisation model is mostly used to help you forecast how much loan and interest you can pay within a certain period of time if you consistently continue to service it as tabulated by the lender.

Factors That Affect Mortgage Rates

If you consult your friends and the media, they may tell you how interest rates have risen or fallen, but the rate you read about in the news or hear about isn’t necessarily the one you’ll receive on your mortgage.

Banks in Singapore take into account several factors that may fluctuate from one borrower to the next–to determine your mortgage rate. Let’s take a look.

1. Credit Score

Your financial history, including credit card payments, previous loans, late payments, and a history of inquiries, makes up your credit score.

In turn, the banks use the credit score to determine if you’re reliable or worth the mortgage amount that you want to borrow.

If they find you have a higher credit score, they may adjust your mortgage rate to lower rates, but if your credit score is low, they might increase your rates or sometimes even deny you one.

The Credit Bureau of Singapore is responsible for generating your credit score reports. It is important to visit or contact them for your credit score when you want to approach HDB for a mortgage so that you know what to expect.

2. Loan Tenure

Your loan tenure is basically the time you’ll take to repay your mortgage.

Since mortgages take from 10 to 30 years to repay, banks tend to reward borrowers who take the shortest time to repay as compared to those taking a longer period with lower interest rates to encourage faster servicing of the loan.

This is because the risks associated with longer periods of time are many, including the possibility of defaulting through death, market fluctuations, and so on.

3. Asset Worthiness And Loan Amount

To determine how much mortgage you can get, banks and lenders will first look at the value of the home you want. Consequently, they use the same criteria to determine your interest rate on the mortgage.

As a result of the higher net interest margins associated with smaller loans, the interest rate on the mortgage is likely to be higher than on larger loans.

Generally, it may be easier for them to salvage their loan amount by seizing a property with a higher value from a borrower if they default on it.

4. Interest Rate Type

As we discussed earlier, there are two popular types of mortgage loans and, therefore, rates in Singapore: fixed rate and floating rate. Let’s start with fixed mortgage rates.

The interest rate remains fixed for the loan tenure, irrespective of market changes. On the other hand, floating interest rates tend to fluctuate and change over the loan tenure.

So before you apply for a mortgage rate, make sure you consult with a financial advisor for financial advice based on the two case scenarios so you don’t paralyse your current or future financial situation.

5. Type Of Lender

Some banks are also careful to analyse your Total Debt Servicing Ratio (TDSR), inflation, economic growth, and the public and private housing market conditions before settling on a mortgage interest rate.

How To Manage Your Mortgage Loan And Interest Rates

Before you visit your bank for a mortgage, or even after you get one, you should plan how to manage it if all of the variables do not remain constant as expected.

One way of doing it is by making a lump sum pre-payment on your mortgage to reduce monthly installments and cut costs on the interest rate that needs to be serviced along with the principal.

If your lock-in period is over, you may consider switching from your existing home loan to a new lender who has lower interest rates or even repricing it with your current bank or lender.

However, before taking any step towards refinancing or repricing your loan, you need to consult your bank on the possibility of undertaking the process and then thoroughly compare the loan package options available if they’re favourable.

Finally, failing to repay or defaulting on your mortgage is the last thing you want to happen to you.

However, if you sense you will not be able to keep up with servicing your mortgage, then it is wise to visit HDB or the bank for advice or even to discuss restructuring your loan repayment options.

Consult Credit Thirty3 For Your Housing Loan

The housing loan interest is calculated based on the amortisation model that creates a payment schedule that determines how much you can pay within the loan tenure.

It is important to understand how the amortisation model works so that you make the right decision when going for a mortgage.

However, for most people, it may prove to be difficult, and in that case, it is important to consult a financial expert to help you – that’s where Credit Thirty3 comes in.

Having been in the financial industry for a while, helping people make the right decisions in the money market, Credit Thirty3 can help you too.