Ok, we know, this Covid-19 season, property-buying probably isn’t one of the main things we’re thinking about.
Things we’re actually thinking about: 1) What should I GrabFood today? 2) I hope my boss can’t tell I’m in bed while on this Zoom call. 3) What else should I GrabFood today?
But with home loan interest rates at an all-time low, it could actually be a good time to enter the property market in Singapore. Here’s a quick guide:
Types of home loans
Bank loan with a floating rate
When you take up such a home loan, you’ll be subject to a variable interest rate, based on market conditions: the Singapore Interbank Offered Rate (SIBOR), the interest rates used by banks in Singapore when lending unsecured funds to each other, or the Swap Offer Rate (SOR), the interest rate calculated based on if the same amount of money were borrowed in US dollars, which in turn depends on the Singapore Dollar’s exchange rate against the US dollar.
Sounds like a whole bunch to take in, but TL;DR: you enjoy lower interest rates in a poorer economy, but will have to deal with higher interest rates when the economy picks up.
Case in point: Interest rates actually used to hover around 3-3.5%, until the Global Financial Crisis in 2008 brought it down to about 1%, and then even lower. The rates were supposed to climb back up, but we all know what happened this 2020 that caused the sharp plunge at the end of the graph…
Wild world out there.
You can check for the SIBOR and SOR rates on the Monetary Authority of Singapore (MAS) website. Currently, interest rates for floating rate home loans are dipping below 1%.
And that’s crazy. If you compare the current interest rate with historical interest rates – or even the current HDB loan interest rate of 2.6%, for instance – you’ll know that you’ll be paying a lot less, like A-L-O-T-L-E-S-S, for your loan.
Bank loan with a fixed rate
A fixed rate home loan means the interest rate remains the same for a specified duration, typically 3-5 years.
After which, the bank may choose to alter the interest rate (although this typically doesn’t increase by much – if they raise fixed rate interest rates for you, this means they’ll also have to pay out higher interests to their fixed deposit customers).
Currently, interest rates for fixed rate home loans are as low as 1.6%.
For HDB flat purchases only. (Sorry for being Captain Obvious.)
Anyway, the interest rate for HDB loans currently stands at 2.6% per annum (fixed at 0.1% above the CPF Ordinary Account interest rate, which has remained unchanged at 2.5% for the longest time).
Another big plus of taking up a HDB loan is that you’re able to borrow up to 90% of your HDB flat’s value, leaving you with only 10% to be paid upfront as downpayment; on the other hand, you can only borrow up to 75% of your HDB flat’s value, meaning you’ll have to first be able to fork out the remaining 25%. For some with limited savings to foot the downpayment, a HDB loan might be the only viable option.
All-time low interest rates
Ok, so get me the floating rate home loan with the lowest interest rate!
At first glance, the floating rate home loan seems like the best choice, since interest rates are waaaay lower.
Couple this with a looming economic recession – which means house prices are set to drop, or at least not rise as quickly – and you’ve got yourself a fab opportunity to enter the property market this 2020, should your financial position allow.
What you should know before committing to the home loan
Interest rates will increase when the economy recovers
Because interest rates have been low for over a decade, it’s easy to mistake it as “the new norm”. But remember that it used to stand way higher at around 3-3.5%.
And while it’s hard to say how long the economy will take to recover, there’s no ruling out the possibility that when it does, we could see interest rates hiking back up to those levels. Furthermore, loan repayment periods typically last 20-25 years, which leaves plenty of room for interest rate fluctuations.
There’s no doubt that it’ll be much easier to pay off your home loan in the short term due to the lower interest rates, but do consult your bank for long-term financial planning tips to counter the potential increase in interest rates.
Access your job security
This is something that banks already take into account when considering whether to grant you a loan and how much, but it’s still something you should be extra careful about, especially in this economic climate (and we’re looking at you too, Covid-19).
If your income situation changes in the process of getting the bank loan:
When you apply for a bank loan, you first have to get an Approval-In-Principle (AIP) for the loan, then sign the Sales and Purchase Agreement for your home, then get the actual loan.
If, between getting the AIP and actual loan, your income situation changes, your bank is not obliged to still grant you your loan, as the AIP was given based on your previously reported income and financial situation.
If your income situation changes after getting the bank loan:
As long as you’re still able to service your loan punctually, banks are generally cool with it.
That said, some bank loans require you to inform them if there are any changes in circumstances, such as your job situation, that could affect your ability to service the loan.
Prepare for government policy changes
If the crazy low home loan interest rates sparks a house-buying craze in Singapore, the government might step in with cooling measures to regulate demand in the property market before prices escalate out of hand.
For instance, Additional Buyer’s Stamp Duty (ABSD) was introduced in 2011, taxing property buyers in order to reduce demand. The government increased the ABSD in 2013 and again in 2018, when demand for property peaked each time.
So if you see a rise in property transactions happening due to buyers taking advantage of low interest rates, it might be time for you to act quick as well. (Currently, the property market is relatively lull because Covid-19 prevention measures are making it tough to view houses or make any property move, but as the Circuit Breaker is gradually lifted, expect to see the property market pick up again.)
Financing your property purchase
Now that you’re more familiar with the money-saving potential of getting a home loan this 2020, you’re ready to confidently go home-shopping!