Tips To Manage Rising Home Loans Interest Rates
After continuous interest rate hikes in 2023 which have increased mortgage loans interest rates globally including those in Singapore, the most recent Federal Open Market Committee (FOMC) meeting in January 2024 has finally concluded that maintained interest rates remained unaffected in the first quarter of 2024.
While the current environment still features high interest rates, there are signs of optimism with expected moderate increases. If you're among the many Singaporeans with an existing home loan or are a new homeowner seeking financing, you might already be feeling the impact of rising interest rates.
With rates trending upwards, any escalation in interest rates could significantly raise monthly payments for those with existing or prospective home loans. Here are some strategies to help you manage the challenge of increasing home loan interest rates and maintain affordable monthly payments.
Strategies To Cope With Rising Home Loan Rates
#1 Consider making partial or full repayments
Use the proceeds from the sale of your HDB flat to make partial or full repayments on your new home loan. This can significantly reduce your loan principal, thereby lowering monthly payments and interest costs.
#2 Increase the use of CPF for monthly loan servicing
You can choose to maximise the use of your Central Provident Fund (CPF) savings for your monthly loan servicing. This reduces the reliance on cash for mortgage payments, easing your financial burden, as long as you ensure that you comply with CPF regulations and maintain sufficient Ordinary Account (OA) balances for future needs.
#3 Look for repricing options in your home loan
Repricing involves transferring your loan package to another within the same bank, typically at a cost that rarely exceeds $800, making it a more economical option compared to refinancing. If your current home loan rate becomes too expensive, repricing to a lower-rate loan within the same bank might be more cost-effective than refinancing altogether.
Certain banks also offer a "free repricing" feature on their home loan packages, allowing you to switch to a cheaper package within the same bank at no additional cost. However, this is subject to specific terms and conditions, and it's not guaranteed that your bank will proactively inform you about it.
It's essential to review the terms and conditions to understand what benefits you are entitled to. For those who haven't yet taken out a home loan, exploring such repricing options in the terms and conditions can be advantageous when deciding between different banks. It could serve as a deciding factor in your choice.
#4 Claim tax deductions if you're a landlord
Landlords should be diligent about claiming tax deductions, especially as property taxes and mortgage interest rates continue to rise, potentially reducing their rental yields. Claiming tax deductions becomes increasingly crucial under these circumstances. It's important to note that landlords can deduct the interest portion of their mortgage repayments.
#5 Opt for a longer interest rate period
Most bank loans are currently based on SORA, but they can be tied to one-month or three-month SORA rates. Some loans might even use longer periods, like six or nine months, though these are rare.
The interest rate period determines how often your home loan repayments are adjusted to reflect the prevailing SORA rate. For instance, a one-month rate means your repayment amount changes every month, whereas a three-month rate is revised quarterly.
In theory (though not guaranteed), a longer interest rate period could save you money when rates are rising. For example, with a three-month rate, you would have paid February’s interest rate for a few months even after a rate hike in March, as the loan adjustment wouldn't occur until April or May.
However, mortgage brokers caution that this theory doesn't always hold true. If the bank applies a higher spread for a longer interest rate period, it might negate any potential savings.
It's advisable to consult an expert to compare options. At the very least, a longer interest rate period simplifies financial planning, which can be beneficial if the broader economy becomes volatile due to factors like the Ukraine war.
#6 Adopt a semi-fixed strategy
Unfortunately, there is no perpetual fixed-rate home loan in Singapore. A viable solution is to refinance between fixed-rate loans when the timing and costs are favourable. For instance, you might opt for a three-year fixed-rate loan now and plan to refinance into another three-year fixed-rate package in 2025.
While the rate could still rise, as there's no guarantee the next fixed-rate loan will be cheaper, this strategy allows you to lock in a stable rate for a longer period and reduce overall volatility. This approach requires careful calculation, as refinancing often incurs costs (e.g., $2,500 to $3,000 in legal fees). It's also important to ensure that frequent refinancing doesn't negate any of your savings.
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Frequently Asked Questions
Can I use my CPF to pay part of my home loan?
- Yes, you are only able to use your CPF Ordinary Account (OA) for partial payments of your home loan, and you can increase the use of CPF for your monthly loan servicing. This reduces the reliance on cash for mortgage payments, easing your financial burden.
Will fixed-rate home loans help me to save costs on my mortgage?
- Yes and no, and it may only be to a certain extent. Refinancing between fixed-rate loans when the timing and costs are favourable may help you make some cost-savings on your mortgage in the long run. It lets you lock in a stable rate for a longer period and reduce overall volatility, but this approach requires careful calculation, as refinancing often incurs other costs (e.g., $2,500 to $3,000 in legal fees).