Fixed rate and floating rate
Fixed rate mortgages have interest rates that are fixed and guaranteed for the initial few years of the mortgage. This will be clearly specified in the offer from the bank. After which, the interest rate will float and be benchmarked to a reference rate. Depending on the mortgage lender, the reference rate can be different between different banks.
The reference rate may be determined by criteria set by the bank itself. It can also be benchmarked against a publicly available index like the CPF interest rate, or the commonly used SIBOR and SWAP.
Even for fixed rate Singapore housing loans, the interest charged will eventually be subject to market forces. That means that during the initial period where you are charged fixed interest rates, it can be considered a promotional rate for you to choose and make housing loan comparison of one bank over another.
Floating interest rate Singapore home loans have interest rates that float from the star of the loan. There are no fixed rate periods. Interest rates are also benchmarked like the floating period of a fixed rate Singapore home loan. Floating rates are also commonly know as variable rates.
The interest rates for the first initial few years are often lower than those of the subsequent years. Again this can be considered a promotional rate period.
Reference rates used for benchmarking can differ from bank to bank. The SIBOR and SWAP are commonly used by the mortgage lenders for benchmark. And these rates are determined by market forces. However a lender may also create it’s own reference rate by considering factors such as prevailing market rates, operational costs, type of housing loan, loan tenure, quantum of property loan requested, etc.
When you have taken up a Singapore housing loan with a reference rate that is self-determined by the bank, they can usually change the reference rate at any time. They have to give you advanced notice before any the change in reference rate can take effect. However, if your property loan uses SIBOR or SWAP as reference rate, you may not receive any interest rate change notice as these rate are publicly available and you were suppose to understand and agree to the rates before accepting the offer.
Effective interest rate housing loan Singapore
The effective interest rate on your mortgage package is an expression of the costs of interest reflected on an annual basis for the life of the mortgage. It essentially means that you will be paying a lower total interest when the effective interest rate is lower.
A good use of effective interest rate is to apply it to make Singapore housing loan comparison between different loan lenders. A home loan calculator that is relevant to Singapore should easily display the effective interest rate that you will be paying.
Do note that the effective interest rate for your mortgage is computed based on the prevailing current interest rates and the assumption that interest rates will remain the same as current rates throughout the life of the mortgage. However, you can expect interest rates to fluctuate over time. So effective interest rates are only a good indication for comparison at one point in time.
Singapore home loan structure
There are 2 common method used by lenders to compute your interest rates.
- Monthly reducing rate. This structure reduces the principal amount every month when you make your installment payment. The interest payable for the following month is based on the reduces principal from the previous month.
- Annal reducing rate. Instead of reducing the principal every month, this structure reduces the principal on an annual basis.
To have a clear picture of how much a portion of your monthly payments are for reducing principal amount and how much a portion goes into paying interest, it is best that the offering bank illustrate this to you with a housing loan calculator. With the break down, you can also make proper comparison between banks.
When your repayment schedule is generated by a housing loan calculator, You can observe more clearly of how the entire mortgage is worked put. Do note that the results generated by the calculator are based on prevailing current interest rates. Interest rates can be revised in the future during the life of the Singapore housing loan.
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