There is much to consider when the time comes to take out a housing loan in Singapore. Though it may seem intimidating and confusing at first, understanding the terms that you are dealing with will help, you get a head start on making your decision. Tools like the mortgage calculators offered by Property Guru can help you plan out payments and what fits best into your budget, but it’s best to start by learning about some aspects of mortgages in Singapore that may be unfamiliar. You’ll want to learn a little bit about how the SIBOR affects interest, the different types of rates that are offered on home loans, and how this factors into why refinancing is common in Singapore. Here’s a bit of an introduction to these concepts to start you on the way to your home loan.
Getting a Grip on the SIBOR
To put it simply, the SIBOR, which stands for Singapore Interbank Offered Rate, is the reference by which banks in Singapore determine interest rates on loans. Experts indicate that the SIBOR is predicted to rise to 2 percent by the end of 2016. You’re probably wondering what this means to you. Basically, the SIBOR will help you determine the initial interest you will be paying on your bank’s home loan, and can in turn help you decide on whether or not a fixed rate home loan or a floating rate home loan is the best choice for you. Though the SIBOR is predicted to rise, it can also fluctuate up and down, and will be added periodically (usually monthly or every three months) to the interest rate your bank already has set in place. Therefore, the SIBOR can cause your total interest rate to either rise or fall over the length of your loan.
Fixed-Rate versus Floating Rates
Now you’re probably wondering what the difference between a fixed rate and floating rate is when it comes to home loans. As you’ve already learned, the SIBOR does play a part in the difference between these two types of loans.
In simple terms, a fixed rate home loan will maintain the same interest rate for a locked in, set period of time, keeping your interest rate and mortgage payments the same for that time period—usually up to about five years. A floating rate home loan, on the other hand, is based on how the SIBOR fluctuates on a month to month, or sometimes three month long period. This means your interest rate and mortgage payment can change along with these fluctuations.
So how are you going to choose between the two? The benefit to a fixed rate home loan is exactly what it sounds like: it’s a fixed rate that will not change. Your payments will be the same, and thus your budget will be predictable and easy to plan. However, you’ll be stuck with the bank you chose for the duration of the time period that goes along with the fixed rate, and won’t be able to refinance if the SIBOR happens to fluctuate downward.
Therefore, a floating rate home loan offers its own advantages. Floating rate home loans often don’t have a lock-in period, which means you may be able to refinance sooner. If you’re financially equipped to handle a potential rise in interest, then a floating rate home loan might be the choice for you, as you may eventually benefit and save money when interest rates fluctuate back downward. You wouldn’t be able to take advantage of these lower rates if you were using a fixed rate home loan.
If interest rates are on the rise, remember that refinancing can be an option. You should periodically compare home loan interest rates between banks, and see if switching to another bank would be beneficial to your finances and lower your monthly payments.
DBS recommends negotiating with your current bank first to see if they can give you a better refinancing offer, but more often than not, you should be prepared to make the switch to another bank. Often, interest on a fixed rate home loan will be locked in with a particular bank, and then be raised by a certain amount after a set period of time, in addition to whatever the SIBOR currently happens to be. This is where researching other banks comes in. As many experts tend to agree, being able to refinance home loans is especially useful in Singapore, because many bank loans do not have permanent interest rates. Thus, you can “shop around” and refinance your loan depending on how the interest rates of different banks may be changing. Be careful, though—refinancing before the term of your current rate expires will usually incur a penalty fee. Make sure you research any applicable fees that might be added to your loan before you attempt to refinance.
Overall, tackling all the aspects of a mortgage for your home in Singapore may seem daunting, but with a bit of research, you’ll figure out the option that works best for you. Of course, the most important tool of all in this process is careful financial planning. Once you’ve figured out what works for your lifestyle and finances, you’ll be well on your way to making the right type of home loan work for you.
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