How Is Housing Loan Interest Calculated In Singapore

Written by Shannon Wong on April 19, 2024

Key Takeaways

In Singapore, housing loan interest is calculated using an amortization schedule, ensuring consistent monthly payments split between principal and interest. Loan types include fixed-rate, providing stable payments, and variable-rate, which can fluctuate with market conditions. Factors affecting mortgage rates include market trends, borrower’s credit score, loan amount, property price, and loan tenure. Understanding these elements helps borrowers make informed decisions about their housing loans.

Are you eyeing to purchase a dream home or contemplating investment opportunities?  If you are, then you need to understand how interest on housing loans is calculated so that you can make smart financial decisions.

This is possibly one of the major life decisions that could significantly affect your financial future. Trust me…you don’t want to go in blind.

Well, buckle up because we’re about to demystify this essential aspect of property financing. 

In a market flooded with loan options – from fixed to variable rates – knowing which is the best deal that fits your current financial situation can be confusing.

This guide breaks down the intricacies of secured versus unsecured loans, decodes the mysteries of amortisation schedules, and uncovers the factors that sway interest rates in Singapore’s housing market.

Ready to embark on a journey towards financial empowerment – let’s dive into the fascinating world of housing loan interest calculation in Singapore.

Understanding the Basics of Housing Loan Interest

What is Housing Loan Interest?

Housing loan interest represents the cost of borrowing funds to purchase property. It’s the additional amount paid on top of the principal loan amount to the lender for the privilege of using their money. Calculating this interest is pivotal to understanding your loan’s total cost over time.

The Principal vs. Interest

When you make a loan payment, it covers two main components: the principal and the interest. The principal is the original loan amount borrowed, while the interest is the cost of borrowing that principal. Initially, a larger portion of your monthly repayment goes towards paying off the interest, with a smaller portion reducing the principal. Over time, as the outstanding principal decreases, the interest component of your repayment decreases, and more of your payment goes towards paying down the principal.

How Is Housing Loan Interest Calculated

The interest on a housing loan in Singapore is typically calculated using an amortisation schedule. This method ensures each monthly payment remains the same, comprising different proportions of interest and principal over the loan period. The exact calculation can vary based on whether the loan is a fixed-rate mortgage or a variable-rate (floating rate) loan.

  • Fixed-Rate Mortgage: Offers the stability of knowing your interest rate and monthly payments will not change over the term of your loan. This predictability benefits budgeting, especially in a rising interest rate market.
  • Variable-Rate Housing Loan: Tends to fluctuate with the market interest rates, meaning your monthly payments can vary. Borrowers prefer this option if they anticipate interest rates will decline.

Amortisation: A Closer Look

An amortisation schedule is a table detailing each periodic payment on a loan. This schedule illustrates how each payment is divided into the interest and principal portions. It shows the gradual reduction of the loan balance until it reaches zero at the end of the term.

For example, if you take a S$500,000 loan with a 7% interest rate over 30 years, your monthly payment is calculated to include both the interest and principal portions. Initially, the interest portion makes up a larger part of the payment, but the interest portion decreases as you continue to pay down the principal.

This calculation method ensures that borrowers can plan for a consistent repayment amount, making financial planning more straightforward.

Types of Housing Loans in Singapore

Fixed-rate vs. Variable-rate Loans

When considering a housing loan in Singapore, one of the first decisions you’ll face is choosing between a fixed-rate and a variable-rate (also known as a floating-rate) loan. Both types have advantages and implications on how interest is calculated and, consequently, your monthly repayments.

  • Fixed-Rate Mortgage: This loan type locks in your interest rate for a predetermined period, typically ranging from one to five years, although longer terms are available. The main advantage is stability; your monthly payment remains unchanged regardless of market fluctuations. This predictability is particularly beneficial for budgeting and financial planning. However, fixed-rate loans generally start with higher interest rates than variable-rate loans, reflecting the premium for locking in the rate.
  • Variable-Rate Housing Loan: The interest rate on these loans can change over time based on the prevailing market conditions. Most variable-rate loans in Singapore are pegged to benchmarks like the Singapore Overnight Rate Average (SORA) or the bank’s internal board rates. Borrowers of variable-rate loans benefit from lower interest rates when market rates decline. However, they also bear the risk of increased monthly payments should interest rates rise.

Secured vs. Unsecured Loans

Another classification of housing loans revolves around security – whether the loan is secured or unsecured.

  • Secured Loans: These are backed by collateral, typically the property being purchased. If the borrower defaults on the loan, the lender can seize the property to recover the outstanding debt. Secured loans generally offer lower interest rates because the collateral reduces the lender’s risk.
  • Unsecured Loans: Unsecured loans do not require any collateral. Due to the higher risk to lenders, these loans come with higher interest rates and are less common for housing loans in Singapore.

Impact on Interest Calculation

  • Fixed-rate loans offer a straightforward interest calculation, as the rate remains constant. Borrowers can easily determine their total interest cost over the fixed-rate period.
  • Variable-rate loans require a more dynamic approach to interest calculation, as the rate can change based on the benchmark it’s pegged to. This means your monthly payment can vary over time, affecting how quickly you pay down the principal and, consequently, the total interest paid over the life of the loan.

Choosing the right type of loan requires careful consideration of your financial situation, risk tolerance, and market conditions. Understanding the nuances of each loan type and how they impact your interest calculations and repayments is crucial in making an informed decision that aligns with your long-term financial goals.

The Amortisation Schedule Explained

An amortisation schedule is fundamental to understanding how repayments are structured for a housing loan. This detailed table illustrates how each payment is divided into principal and interest over the loan’s life, providing clear insights into the financial trajectory of your loan repayment.

Understanding Amortisation

Amortisation is the process of spreading out a loan into a series of fixed payments over time. While the total payment amount remains constant, the portion that goes towards the interest decreases with each payment, and the portion that goes towards reducing the principal amount increases correspondingly.

Components of an Amortisation Schedule

An amortisation schedule includes several key components:

  • Payment Number: This column lists the sequence of payments from the first to the last.
  • Payment Amount: This shows the total amount paid in each instalment, which remains constant in a fixed-rate loan scenario.
  • Interest Amount: Indicates how much each payment is allocated towards interest. This amount decreases over time as the principal balance is reduced.
  • Principal Reduction: Displays the portion of the payment that goes towards lowering the principal balance.
  • Remaining Balance: Reflects the outstanding balance of the loan after each payment.

How It Affects Your Loan

The initial stage of a loan term sees a higher proportion of each payment being applied towards interest, with a smaller portion reducing the principal. This dynamic shifts as the loan matures, with more of your payment going towards principal reduction, accelerating equity build-up in the property.

Example of an Amortisation Schedule

Consider a S$300,000 loan with a 3.5% interest rate over a 30-year term. Your monthly repayment, calculated using the amortisation formula, would be a fixed amount, with the initial payments heavily skewed towards interest. As you progress through the loan term, the interest portion of each payment decreases while the principal portion increases.

MonthMonthly PaymentPrincipal PaymentInterest PaymentRemaining Balance
1$1,347.13$369.27$977.86$299,630.73
2$1,347.13$370.77$976.36$299,259.96
3$1,347.13$372.27$974.86$298,887.69
358$1,347.13$1,342.48$4.65$4,975.58
359$1,347.13$1,341.15$5.98$3,634.43
360$1,347.13$3,634.43$0.70$0.00

This example illustrates how each payment reduces the principal amount owed, with a decreasing interest component over time.

Why It Matters

Understanding your loan’s amortisation schedule is crucial for financial planning. It allows you to see the impact of each payment on your loan balance, helps you gauge the pace at which you’re building equity in your property, and can influence decisions about refinancing or making extra payments.

Factors That Affect Mortgage Rates

A variety of factors influence mortgage rates in Singapore, each playing a critical role in determining the cost of your loan. Understanding these factors can help you secure a more favourable rate, potentially saving thousands over the life of your mortgage.

Market Conditions

The prevailing economic environment has a significant impact on mortgage rates. During economic growth and inflation periods, rates tend to rise to keep inflation in check. Conversely, rates may be lowered in times of economic downturn to encourage borrowing and investment.

Credit Score

Your credit score is a critical determinant of the interest rate you’ll be offered. It reflects your creditworthiness based on your past borrowing and repayment history. A high credit score indicates to lenders that you’re a low-risk borrower, which can result in lower interest rates. Conversely, a lower score may lead to higher rates due to the perceived increased risk.

Loan Amount and Property Price

The amount you borrow relative to the property’s value (loan-to-value ratio) can affect your interest rate. Generally, smaller loans on less expensive properties may have slightly higher interest rates due to the fixed costs associated with processing a loan, whereas larger loans often attract lower rates.

Loan Tenure

The length of your loan term also influences your interest rate. Shorter loan terms typically have lower interest rates compared to longer terms, reflecting the shorter time frame for interest to accrue. However, shorter terms also mean higher monthly repayments.

Fixed Interest Rate vs. Variable Interest Loans

  • Fixed Interest Rate: Loans with a fixed interest rate provide stability, as your rate remains unchanged for the duration of the fixed-rate period. This can protect you from interest rate increases but might result in higher rates initially compared to variable-rate loans.
  • Variable Interest Loans: These loans have rates that fluctuate over time, usually in line with market conditions. They may start with lower interest rates than fixed-rate loans, but the uncertainty of rate adjustments poses a risk of higher future payments.

Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR)

  • TDSR: This regulatory framework ensures borrowers are not over-leveraged. It caps the portion of a borrower’s gross monthly income that can go towards servicing all debts at 55%. A higher TDSR can impact your eligibility for higher loan amounts or more favourable rates.
  • MSR: For housing loans, the MSR limits mortgage repayments to 30% of a borrower’s gross monthly income. This ratio further ensures affordability but can limit the amount you can borrow, potentially affecting the interest rates available to you.

Understanding these factors can help you to make informed decisions about your housing loan, whether you’re negotiating terms with lenders or deciding between different types of loans. By managing your credit score, considering the loan amount and tenure, and understanding how market conditions and regulatory ratios affect rates, you can position yourself to secure a more favourable mortgage deal.

Whether you’re buying a new house or planning to enhance it, 1AP Capital’s tailored financial solutions ensure you have everything you need under one roof. Ready to shape your ideal living space? Explore your loan options with us today and step confidently into your future home, designed just the way you want it.

Can You Lower Your Monthly Mortgage Payment?

For many homeowners, finding ways to reduce the monthly mortgage payment is a priority, especially in the face of financial uncertainties or changes in income. Fortunately, several strategies can help achieve this goal, saving you money over the life of your loan.

Refinance Your Mortgage

Refinancing involves taking out a new mortgage with different terms to replace your existing loan. This can be an effective way to lower your monthly payments significantly if interest rates have dropped since you took out your original loan. Refinancing can also allow you to switch from a variable-rate to a fixed-rate loan, offering more predictable monthly payments.

  • Impact on Interest Rates: Refinancing to a loan with a lower interest rate can significantly reduce the amount of interest you pay over time.

Extend Your Loan Tenure

Extending the term of your loan can reduce your monthly payments by spreading the repayment over a longer period. While this can make monthly payments more manageable, it’s important to note that it may increase the total interest paid over the life of the loan.

  • Consideration: This option is most suitable for borrowers who need immediate relief from high monthly payments and are willing to accept the trade-off of paying more interest in the long run.

Make a Larger Down Payment

If you’re in the process of obtaining a mortgage, making a larger down payment can reduce the loan amount, leading to lower monthly payments. This strategy decreases the loan-to-value ratio, qualifying you for better interest rates. Lower loan principal from the start means less interest accumulation over the loan’s duration.

Pay More Towards Your Principal

Paying more than the required monthly payment can help reduce the principal balance faster. This shortens the loan term and decreases the total interest paid. Consider making lump-sum payments towards the principal or paying a little extra monthly.

Shop Around for Better Rates

Before settling on a mortgage, comparing offers from multiple lenders is crucial. Small differences in interest rates can lead to significant savings over time. Use loan comparison tools and negotiate with lenders to secure the best possible rate.

Improve Your Credit Score

A better credit score can qualify you for lower interest rates. Take steps to improve your credit by paying bills on time, reducing debt, and correcting any errors on your credit report. Not only can this lower your mortgage rate, but it can also positively impact rates on other forms of credit.

Consider Loan Programs with Better Terms

Some loan programs, especially those designed for first-time homebuyers or specific borrower categories, may offer more favourable terms, including lower interest rates or government subsidies. Look into government-assisted loan programs or special lender offers that align with your borrower profile.

Implementing one or more of these strategies can lead to substantial savings on your mortgage. It’s important to evaluate each option carefully, considering your long-term financial goals and the potential impacts on your total loan cost.

Making Informed Choices on Your Housing Loan

We’ve covered some serious ground on unpacking the mysteries of housing loan interest in Singapore. But remember, mastering this financial maze isn’t just about crunching numbers – it’s about empowering yourself with knowledge to make savvy decisions.

Whether you’re torn between fixed or variable rates or wondering how your credit score fits into the equation, each choice you make shapes your path to financial freedom. And hey, if you’re feeling a bit overwhelmed or just need some personalised guidance, we’ve got your back.

Here at 1AP Capital, we’re all about tailoring loan solutions to fit your unique needs. So, why wait? Let’s kickstart your journey to homeownership success together. Ready to take the plunge? Apply now, and let’s make your dreams a reality!

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