SINGAPORE: Earlier this week, Singapore’s three biggest banks – DBS, OCBC and UOB – raised their fixed home loan interest rates to between 4.25 and 4.5 per cent.
This was the banks’ second increase in less than two months, driven by factors such as the US Federal Reserve raising the benchmark lending rate and Singapore’s core inflation rising to 5.3 per cent in September.
With interest rates set to rise further, should home buyers lock in a fixed rate home loan now or turn to floating rate packages instead?
CNA put the question to some property analysts and also asked how they expect things to change in the next year.
First off, what’s the difference between a fixed and floating rate home loan?
A fixed home loan has interest rates that remain unchanged throughout the lock-in period. A floating loan, on the other hand, varies throughout the life of the loan, depending on the economy and market conditions.
In Singapore, a floating rate home loan is usually pegged to the Singapore Interbank Offered Rate (SIBOR), a Fixed Deposit Based Rate (FDR) or the Singapore Overnight Rate Average (SORA). The first two are being phased out and the floating interest rate will soon be pegged only to SORA.
The three-month compounded SORA has risen from 0.1949 per cent at the beginning of this year to 2.6994 per cent as of Friday (Nov 18).
There are also hybrid loans, where a portion of the home loan can be structured with a fixed rate and the remaining with a floating rate.
How much do home buyers have to pay in monthly installments now?
Based on a S$500,000 loan with a 25-year tenure, an HDB flat buyer would pay S$2,709 a month under the DBS two-year fixed rate package with 4.25 per cent interest rate per year.
A similar floating rate loan with DBS charges the three-month compounded SORA plus a margin of 1 percentage point. This gives an interest rate of 3.69 per cent a year based on Nov 18 rates, meaning that a home buyer would pay S$2,554 a month.
If you pay less on a floating loan, shouldn’t you just opt for that?
It’s not so simple.
Given that interest rates are expected to rise in the foreseeable future, it might still make sense to take a fixed rate package, said Mr Bruce Chow, property platform 99.co’s SRX head of loan concierge.
“As things are right now – there is no certainty when rates are concerned. Rates may fall if there is another global pandemic. But right now, there is inflation across the world and for the Fed, their main concern is to counter inflation and that involves rate hikes,” he said.
Analysts say home buyers need a good understanding of their situation, life plans, cash flows, assets, liabilities and openness to risk before choosing home loan packages.
Mr Paul Wee, the vice-president of PropertyGuru Finance, said home buyers who believe that interest rates will continue to rise may want to opt for fixed rate loans.
“Others would believe that the rates have gone up substantially and have little runway to go much higher. For them, it would make sense to go with the floating rates,” he said.
Those who dislike volatility should also go for a fixed rate loan, said Huttons Asia’s senior director of research Lee Sze Teck.
“However, should interest rates change direction subsequently, opting for a long lock-in period like five years prevents buyers from switching and they may end up paying more for many years.
If they are worried about that, buyers can look at loans with a shorter lock-in period like one or two years, he said.
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