Singapore housing loans: What do record low rates mean for me?

Singapore housing loans have hit record lows, with banks like DBS offering rates of one percent per annum. This is a return to levels not seen since Q1 2014. This will undoubtedly bruise landlords and home buyers who opted for fixed interest rate loans, in expectations of rate hikes. However, time may still prove their decision correct:

How much cheaper have Singapore housing loans become?

For comparison, we will compare the HDB Concessionary Loan (which is mainly stagnant) with the current bank rates.

The HDB Concessionary Loan has an interest rate of 0.1 percent above the CPF Ordinary Account (CPF OA) rate. This is currently 2.5 percent, so HDB loans have an interest rate of 2.6 percent per annum. But private bank loans are at record lows, and it is now possible to get rates at 1.3 percent per annum.

Say you were to purchase a flat, and the total amount you borrow is $450,000. The loan tenure is 25 years.

Under the HDB loan, you would pay about $2,042 per month. At the end of 25 years, you would have paid a total interest of around $162,454.

On the other hand, with a bank loan at 1.3 percent (assuming the interest rate stays constant over the same duration), you would pay about $1,758 per month. At the end of the loan, you would only have paid around $77,321 in interest.

This results in an admittedly strange situation, in which private property buyers pay much less than counterparts using public housing loans. But it is not that clear cut, as one problem with bank loans is how prone they are to fluctuations.

HDB loans are not truly fixed, in that they are based on CPF OA rates, and these rates are revised every quarter. As a practical reality however, the rate seldom changes. With private bank loans, rates are more unpredictable – along with windfalls like the current one, borrowers can also see sharp, overnight surges in rates, much like getting an Uber during rush hour.

How are interest rates determined anyway?

For private bank loans, the interest rate always consists of the bank’s spread, plus an index. Most residential property loans use the Singapore Interbank Offered Rate (SIBOR) as the index (a small handful may use the Swap Offer Rate, or SOR, instead).

SIBOR is the median rate of Singapore’s top banks. This is added to the bank’s spread (the amount the bank charges for the loan) to determine the overall rate. So a typical home loan might be 0.9 percent plus the one month SIBOR rate. This could mean:

0.9 (bank’s spread) + 1.2 percent (one month SIBOR rate) = 2.1 per cent interest per annum

The SIBOR rate fluctuates daily. A three month SIBOR rate means the interest rate (and hence mortgage repayment amount) is revised to match the current SIBOR rate every three months, whereas a one month rate means the rate changes every month.

SIBOR fluctuates due to movements in the global economy. As such, policy decisions in other countries can have a significant impact on home loan interest rates in Singapore. This is what we are currently seeing in the market.

Home loan rates are plummeting because of the United States Federal Reserve

The United States Federal Reserve (the Fed) affects SIBOR with the interest rates it sets. Recently, on the back of rising employment, the Fed decided to raise interest rates (keeping interest rates too low, for too long a period, can cause high inflation – although this has persistently failed to occur in the US economy).

There were supposed to be four interest rate hikes, the first of which was announced in Q4 2015 when a marginal 0.25 percent increase was introduced. This led analysts to conclude that SIBOR rates would rise in tandem, predicting that it would reach two percent by end 2016.

However, recent upheavals in the global economy have made the Fed rethink their plans. The UK’s unexpected decision to leave the European Union caused turmoil in the market, and significantly lowered the strength of the British pound.

The related uncertainty, along with the unusually strong US dollar, has caused the Fed to can the other three planned hikes, and analysts will no doubt revise their expectations of SIBOR rates downward. This is the main cause of the various banks significantly lowering the rate for Singapore housing loans.

Will it last for Singapore housing loans?

It is impossible to be sure how long these low rates will last. It’s worth keeping in mind that the Fed can – and will – backtrack on its decisions if necessary. A home buyer should not count on interest rates remaining this low for the long term.

That said, the low interest rates do provide relief for a struggling rental market. Landlords now have the option to refinance into unusually low rates, which should compensate for decreasing rental incomes. Property buyers, who already have access to deep discounts in the current slump, will be able to pay low mortgage rates on top of getting a good deal.

However, those who seek to refinance from HDB loans to bank loans might want to rethink such a decision. The prospect of halving the interest rate is certainly attractive – but you cannot convert a bank loan back into a HDB loan, should the rates spike afterward.