Buying a home in Singapore is a major milestone—and one of the biggest financial decisions most people will ever make. Whether you’re purchasing your first flat or upgrading to a larger space, a housing loan is often necessary to make your dream home a reality. But beyond just securing a loan, it’s essential to understand how housing loan interest is calculated, as it directly affects your monthly repayments and the total cost of the property over time.
While traditional banks are the go-to option for many, some buyers consider borrowing from a private money lender, especially when they need faster approval or have unique financial circumstances. These lenders offer more flexible terms but often come with higher interest rates and stricter repayment conditions.
This guide will help you understand the different types of housing loan interest rates in Singapore, how they work, and what to keep in mind before choosing a loan package that fits your needs and goals.
Understanding Housing Loans in Singapore
A housing loan in Singapore is a type of financing used to purchase property—whether it’s an HDB flat, a private condominium, or a landed home. These loans are typically offered by banks and financial institutions, and in the case of HDB flats, buyers also have the option to apply for a loan directly from the Housing & Development Board (HDB).
One of the most critical aspects of any housing loan is the interest rate, as it significantly impacts your monthly repayments and the total amount you’ll pay over the life of the loan.
In some cases, when buyers need additional funds for renovations, furnishing, or other related expenses, they may choose to take out a personal loan alongside their housing loan. While a personal loan offers quick access to cash without collateral, it usually comes with higher interest rates and shorter repayment periods, so it’s important to plan wisely and borrow only what you can manage.
The Two Main Types of Housing Loan Interest
In Singapore, housing loan interest is typically calculated using one of two structures:
a. Fixed Interest Rate
A fixed interest rate remains the same for a set period, usually between one to five years. During this period, borrowers pay the same monthly instalment, making budgeting more predictable.
- Pros: Stability, easier financial planning, protection from interest rate hikes.
- Cons: Typically higher than floating rates; less savings if market rates fall.
Example:
If you borrow S$500,000 at a fixed rate of 2.8% per annum for 3 years, your interest rate won’t change during this period regardless of market conditions.
b. Floating (or Variable) Interest Rate
A floating rate changes over time, usually pegged to benchmark rates like the Singapore Overnight Rate Average (SORA), Fixed Deposit Home Rate (FHR), or the bank’s board rate. These rates are reviewed and adjusted regularly.
- Pros: Potentially lower rates when market rates fall.
- Cons: Less predictability; rates can rise unexpectedly.
Example:
A bank may offer a package like “3M SORA + 1%”, where the rate is reviewed every three months. If the 3-month SORA is 1.2%, the effective interest becomes 2.2%.
Interest Rate Pegs Explained
Understanding what your floating interest rate is pegged to helps you anticipate fluctuations:
a. SORA (Singapore Overnight Rate Average)
SORA is administered by the Monetary Authority of Singapore (MAS) and reflects the average rate of unsecured overnight interbank Singapore dollar transactions. It is considered more transparent and less volatile than previous benchmarks like SIBOR.
b. Fixed Deposit Home Rate (FHR)
This is based on the interest rates the bank offers for fixed deposits. FHR is generally more stable but is still subject to changes based on the bank’s internal review.
c. Board Rate
This is an interest rate determined by the bank and can be changed at its discretion. While some packages are offered with low initial board rates, borrowers should be wary as changes are often non-transparent.
How Is the Interest Amount Calculated?
a. The Reducing Balance Method
In Singapore, housing loan interest is typically calculated using the reducing balance method. This means that interest is computed on the outstanding loan balance, not the original principal.
Each monthly repayment consists of:
- Interest Payment: Based on the current outstanding principal.
- Principal Repayment: The amount used to reduce your loan balance.
As your principal reduces over time, the interest portion decreases and the principal portion increases.
Illustration:
Let’s assume:
- Loan amount: S$500,000
- Loan tenure: 25 years
- Interest rate: 2.5% p.a. (fixed)
In the first month:
- Interest = (2.5% ÷ 12) × 500,000 = S$1,041.67
- Total monthly repayment ≈ S$2,243.08
- Principal repaid = S$2,243.08 – S$1,041.67 = S$1,201.41
In subsequent months, as the loan balance reduces, so does the interest payable.
Total Interest Paid Over Loan Tenure
The total interest you pay over the life of a loan can be substantial. Using the same example:
- Loan amount: S$500,000
- Interest rate: 2.5%
- Tenure: 25 years
- Total repayment: ≈ S$672,923
- Total interest paid: ≈ S$172,923
By shortening the loan tenure or making partial repayments, you can reduce the overall interest burden significantly.
Comparison: Bank Loan vs. HDB Loan
| Feature | Bank Loan | HDB Loan |
|---|---|---|
| Interest Rate | Varies (1.5% to 3%) | Fixed at 2.6% (pegged at CPF OA + 0.1%) |
| Flexibility | Higher; more package options | Lower; limited to eligible buyers |
| Downpayment | 25% (5% cash, 20% CPF/cash) | 20% (can be fully paid with CPF) |
| Penalties | Early repayment charges may apply | No penalty for early repayment |
| Eligibility | Less strict (age/income considered) | Subject to HDB criteria (e.g. income ceiling) |
Factors That Affect Your Loan Interest Rate
Lenders assess various factors before offering you a housing loan interest rate:
a. Credit Score and Credit History
A strong credit rating gives you access to more competitive rates. Missed payments or excessive debt can result in higher rates or even rejection.
b. Loan Tenure
Longer tenures reduce monthly instalments but increase total interest paid. Shorter tenures may attract slightly lower interest rates.
c. Property Type
Loans for private properties may have different rates compared to HDB flats due to perceived risk and market conditions.
d. Economic Conditions
Interest rates may rise or fall based on economic indicators, inflation, and central bank policies. This directly affects floating rate packages.
Tools and Calculators
There are several online housing loan calculators available via bank websites and financial comparison portals in Singapore. These calculators allow you to:
- Estimate your monthly repayments
- Project total interest payable
- Compare fixed vs floating packages
- Evaluate savings from early repayments
It is advisable to use these tools before committing to a loan package to visualise your long-term financial obligation.
Early Repayment and Refinancing
a. Early Repayment
If your loan package permits, making lump-sum payments towards your housing loan principal can significantly reduce your total interest. However, check for prepayment penalties, especially within the lock-in period.
b. Refinancing
You may refinance your loan with another bank offering a lower rate after the lock-in period. Refinancing can reduce monthly payments or shorten your tenure—but do consider legal fees and processing charges, which can amount to a few thousand dollars.
Tips to Minimise Interest Costs
- Choose the right loan tenure: A shorter tenure may be more demanding monthly, but significantly reduces total interest.
- Make regular lump sum repayments: Even a small annual payment towards the principal can save thousands in interest.
- Refinance when rates drop: Periodically review the market and refinance when favourable rates are available.
- Maintain a good credit score: This ensures better terms and lower rates during refinancing or loan application.
- Compare packages carefully: Consider not only interest rate but also lock-in periods, penalty clauses, and flexibility.
Final Thoughts
Understanding how housing loan interest is calculated in Singapore empowers homebuyers to make informed financial decisions. Whether you prefer the predictability of a fixed rate or the potential savings of a floating package, it’s essential to grasp how your repayments are structured and how different rate mechanisms affect your total loan cost.
With property prices remaining high and interest rates fluctuating in today’s economic climate, diligent planning and regular loan reviews are key. After all, your home should be a source of security, not financial strain.
