We’re halfway through 2022 and already global interest rates (and hence, Singapore mortgage rates) have gone up twice. The US Federal Reserve raised interest rates by three-quarters of a percentage point in June 2022 and again in July 2022. With rates expected to continue rising in 2022 and beyond, this has been a cause of concern for many in Singapore – especially those with floating-rate home loans.
Ben Goh, Team Lead, Mortgages for PropertyGuru Finance states that “those on variable rates may see rates going up even higher”, citing the 3M SORA’s rise from 0.24% to 0.49% between March and May 2022 as an indication of what is to come. Some experts even think mortgage rates could possibly rise to 4% by the end of the year.
If you’re wondering about what you can do now that interest rates have risen, we’ve got you covered! Together with Ben, we’ll explore if rushing home loan repayments or refinancing now is the right move for existing homeowners to make.
Should You Rush Home Loan Repayments?
Given that how much more interest you pay for a home loan depends largely on your loan tenure, it might be tempting to consider paying off your home loan ASAP to keep interest payments minimal.
Hold that thought for a minute, because while shorter loan tenures do generally mean a lower overall interest cost, there are pros and cons to rushing your loan repayment. Whether or not it is a good idea really depends on the home loan you’ve chosen and how you’re financing it.
Regarding rushing home loan payments, we’ll explore what happens if you:
- Pay off your bank loan early
- Pay off your HDB-granted loan early
- Use cash to pay off your mortgage more quickly
1. What Happens When You Pay Off Your Bank Loan Early?
It’s important to first calculate if the savings in doing so are significant compared to how much interest you would pay in keeping to your loan tenure. Early repayments may come with some downsides for those who utilising CPF funds, especially if the loan interest rates are lower than CPF interest rates.
Let’s suppose you’ve taken a $200,000 loan from the bank to be paid off in 20 years at 1.5% p.a., and you have $250,000 of CPF OA savings. This is how much you can expect to pay for your loan.
Disclaimer: It is hard to predict how your interest rate will change throughout the entire duration of your tenure. For this example, we assume that the interest rate remains constant even though this may not be the case in reality. Do note all figures are rounded up to the nearest whole number.
| Calculations (based on 75% LTV, 1.5% fixed interest rate) | Sticking to your loan |
| Loan principal | $200,000 |
| Tenure | 20 years |
| Total interest payable | $31,622 |
| Total loan amount you will expect to pay (including interest) | $231,622 |
| Monthly repayments | $965 per month |
Let’s say you’ve been servicing your loan for 10 years. This is how much you would have paid and how much is left in your CPF Ordinary Account (OA).
| Calculations | Amount after first 10 years |
| Principal paid | $92,519 |
| Interest paid | $23,292 |
| Remaining loan | $107,481 |
| Total CPF interest earned, 2.5% p.a. | $52,841 |
| CPF balance | $187,030 |
Now, you are considering quickly paying off the remaining loan in the next five years, in order to capitalise on your current interest rates. Depending on the terms of your loan, you may end up incurring early repayment penalties.
The below calculations assume a mortgage interest rate of 1.5% p.a.
Monthly repayments
$965
$1,860
Remaining loan amount
$107,481
$107,481
Interest paid
$8,329
$4,148
Total principal paid
$200,000
$200,000
Total interest paid
$31,622
$ 27,441
Total CPF interest earned, 2.5% p.a.
$88,045
$68,761
In repaying your loan in five years, the total interest you pay for your mortgage will be about $4,000 less compared to sticking to your 20-year tenure.
However, your CPF OA funds are depleted more quickly in the five years, resulting in nearly $20,000 less interest earned in your CPF OA! Depending on your age, this may also mean less funds for your Retirement Account (RA).
2. What Happens When You Pay Off Your HDB Loan Early?
If you are on an HDB loan, your interest rates are pegged at +0.1% to the CPF OA interest rate. It is currently 2.6%, and has been for many years. Assuming the Singapore government does not make any changes to the OA interest rate, your home loan interest rates will not change.
Nonetheless, HDB allows loanees to pay off the loan early without incurring any penalties, referred to as redemption of HDB housing loan.
This is great if your goal is to be debt-free. But while this reduces the total amount of interest paid, it will mean that finances are now locked into an illiquid asset, and the funds will not be available until the flat is sold.
3. Should You Use Cash to Pay Off Your Mortgage Faster?
The same can be said if you are financing your home loan with cash. Ben shares that rushing your mortgage repayments will result in an “opportunity cost if we are heading towards a bear market” (i.e. when the market experiences prolonged price declines).
With funds funnelled into the mortgage, you may miss out on investment opportunities when market conditions become more favourable.
In a nutshell, you should only hasten your monthly repayments if your finances can support the higher monthly instalments and any repayment penalties you might incur. Remember, the interest rate hikes are usually accompanied by inflation, and the rising costs of goods and services also need to be accounted for.
So, Should You Refinance While Interest Rates are Rising?
If you had previously locked-in a good rate before the rate hike this year, you may be in a good position to wait it out. However, if your mortgage package’s promotional rates have expired or are expiring (e.g., it is the end of your 2-year package and the rates are going to increase anyway), then you may consider refinancing your home loan.
When interest rates are low (such as in the past two years), refinancing is an obvious strategy to maximise savings. But what about in a high-interest rate environment?
In this case, refinancing could still give you the opportunity to switch to a more competitive mortgage, depending on your current loan. During such times, the choice between a fixed or variable interest rate will depend on your risk appetite and outlook on the interest rate trends. In some ways, higher rates may be unavoidable, but making the most of the present refinancing opportunities can still provide some savings.
What You Can Do to Manage Rising Interest Rates
1. Choose Fixed Interest Rates if You Don’t Like Risk
While both loan types have their pros and cons, Ben advises that those who have a low-risk appetite are more suited for fixed rates, even though the rates will be higher than floating loan rates.
Fixed loan rates will not fluctuate as much, and can provide more security and peace of mind. Refinancing to fixed-rate home loans may also be ideal for those who are already on a variable rate loan and wish to hedge against rising interest rates.
2. Choose Floating Interest Rates if You Have a Higher Risk Appetite
On the flip side, those who have an appetite for some risk can still consider floating home rates. While floating rates are expected to rise, they are predicted to do so gradually which means your monthly instalments will not spike significantly in the short-term.
Additionally, those who are more financially savvy may be able to capitalise on the fluctuating loan rates and maximise savings based on calculated risks.
Nonetheless, Ben reminds us that refinancing is also an opportunity to adjust the existing loan tenure and repayment amount to something more manageable, such as by increasing the loan tenure to reduce monthly repayments.
3. Go for Hybrid Fixed and Floating Rate Packages
Alternatively, you can go for hybrid fixed and floating rate packages. Hybrid packages allow you to enjoy the best of both worlds. Though you harbour some risk that comes with a floating rate loan, it is lowered, and you still enjoy the assurance and certainty offered by fixed rates.
Furthermore, the hybrid loan packages have interest rates that are usually lower than pure fixed-rate loan packages.
For instance, DBS’ Two-In-One Home Loan package gives their borrowers the flexibility to have up to 50% of their loan amount under a fixed rate, and the rest under a floating rate package, subject to special rates.
No One-Size-Fits-All Solution for Choosing Best Mortgage
With these interest rate adjustments by major banks, it can be well and truly said that the era of low-interest rates is over. Now, it’s just a question of how much interest rates will rise.
Ultimately, there’s no right or wrong answer in terms of whether or not to refinance, or to finish repaying your mortgage early while interest rates are on the rise. It may even be a case of paying more in interest, in the long run, to ensure that monthly repayments are manageable, especially while prices of other goods and services go up.
Whichever the case, what’s important is being prepared in the event of unforeseen circumstances, such as by applying for mortgage insurance. Ben advises that mortgage insurance can help “alleviate the burden of servicing the home loan” in unforeseen circumstances when the home loan is no longer serviceable.
If you’re still unsure about what to do with your home loan amidst the current interest rate hikes, not to worry! PropertyGuru’s Mortgage Experts will be able to help with your home loan or refinancing needs!
Chat with us on Whatsapp
Fill up an online form
Disclaimer: The information is provided for general information only. PropertyGuru Pte Ltd makes no representations or warranties in relation to the information, including but not limited to any representation or warranty as to the fitness for any particular purpose of the information to the fullest extent permitted by law. While every effort has been made to ensure that the information provided in this article is accurate, reliable, and complete as of the time of writing, the information provided in this article should not be relied upon to make any financial, investment, real estate or legal decisions. Additionally, the information should not substitute advice from a trained professional who can take into account your personal facts and circumstances, and we accept no liability if you use the information to form decisions.