Last Updated on June 15, 2023 by Tree of Wealth

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If you’re thinking of buying your first home, you’re probably trying to choose your financing options. But, before you decide, you must first understand how mortgage interest rates are calculated. Before you get confused by SIBOR vs. SORA, and fixed vs. floating rates, stop and breathe!

Take a look at this article. This guide will enlighten you on the different ways interest rates are determined so you can make a better-informed decision.

How is the mortgage interest rate calculated?

HDB loans

If you decide on an HDB housing loan, interest rates are pegged at 0.10% above the prevailing CPF Ordinary Account (OA) interest rate. HDB may adjust this rate in January, April, July, and October in line with CPF interest rates. The 0.1% covers HDB’s cost of loan administration.

The CPF Ordinary Account interest rate is pegged to three major local banks’ (DBS, UOB and OCBC) three-month average fixed deposit and savings rates. In addition, there is a legislated floor rate of 2.5% per annum. While the rate is reviewed quarterly, it has stayed at 2.5% since 1999. But if the CPF Ordinary Account interest rate increases, the HDB loan rate will also rise.

If you’re considering buying an HDB flat, you may be eligible to take up an HDB housing loan. But take note there are several restrictions. For instance, only Singaporean home buyers below certain income ceilings can tap into an HBD housing loan. The ceiling is S$14,000 for families, S$21,000 for extended families and S$7,000 for singles.

If you cannot meet the requirements for an HDB housing loan or are buying a private property, then it’s time to consider a bank loan from a financial institution.

Bank loans: fixed or floating interest rates?

When you take a bank loan for a property in Singapore, you first consider whether you want to take a fixed or floating rate.

Floating rates: SIBOR vs SORA

As their name suggests, floating interest rates (also known as variable interest rates) depend on market fluctuations. Bank loan packages typically peg interest rates to the Singapore Interbank Offer Rate (SIBOR) or the Singapore Overnight Rate Average (SORA).

What is SIBOR?

The meaning of SIBOR is Singapore Interbank Offer Rate. It is a benchmark interest rate that determines the cost of short-term loans between banks in Singapore. In laymen terms, it’s based on the rates at which banks would lend to one another if they needed a loan, and updated every day.

The SIBOR rate is used to price derivatives, corporate loans to small and medium-sized businesses, government and corporate bonds, and housing loans. You can check the current SIBOR rates on the Association of Banks(ABS) website daily. Take note that loans based on SIBOR will be discontinued by the end of 2024.

What is SORA?

The SORA stands for Singapore Over-night Rate Average, which changes daily at midnight. The SORA interest rate is not new and has been used to price certain commercial loans since 2005.

To calculate the current SORA interest rate, banks must provide data on all eligible transactions traded and booked in the unsecured overnight interbank market between 8 am and 6.15 pm. After that, MAS will validate the data and calculate the volume-weighted average rate of all eligible transactions. MAS will publish this rate the following day at 9 am on the website. This means that SORA is based on backwards-looking overnight transactions, unlike SIBOR, which is based on forward-looking future transactions.

All these interest rate references fluctuate daily, so if you’re taking a housing loan with your interest rate pegged to them, your loan repayments will change too. For example, the SORA interest rates in Singapore will tend to increase when there’s inflation and decrease during a recession. However, it can fluctuate according to other trends and external events worldwide(e.g. the Ukraine war causing oil prices to increase).

Similarly, if the inflation rate increases, banks must lend money above the usual rate to prevent it from losing value. So with inflation, SIBOR rates increase as well. Therefore, when there are high inflationary pressures in the economy, your interest rates, whether pegged to SIBOR or SORA,  will significantly affect your mortgage repayment.

Fixed interest rates

A fixed rate is a fixed interest rate that will apply through the mortgage agreement within the locked-in period of two to three years. During the lock-in period, the bank does not tie fixed interest rates to any reference rates. However, once the lock-in period passes, interest rates will be pegged to other market rates, usually SIBOR or SORA. This would then give you an indication of whether you should refinance.

For instance, looking at DBS’s 2-year fixed home loan packages, you will see that the first two years of loan interest rate is fixed at 2.5%. After that, the interest rates are pegged to SORA (Singapore Over-night Rate Average) rates.

In terms of planning, it makes it easier for you to plan your finances for the next few years since interest rates will not increase due to market fluctuations. However, fixed interest rates tend to be higher than floating interest rates. For a quick comparison, the 3-month SORA Interest as of 3 October 2022 is currently at 2.2353%. However, the fixed interest rate for DBS Is 2.5%.

Fixed or floating interest rate: which should I choose?

Most banks offer 1-month or 3-month SIBOR or SORA rates when you take a loan from them. The months refer to how often the rates are refreshed. Therefore, a 3M SIBOR or SORA rate will be more stable since the rates are adjusted every three months.

For this reason, if you choose floating interest rates, you need to be prepared to pay more when interest rates increase. But on the other hand, the advantage is that you will save when interest rates dip. In other words, your loan repayments are susceptible to market conditions.

But most banks in Singapore will offer a mix of fixed and floating, which means that you’ll be locked into a fixed rate for 2-3 years before being subjected to the variable benchmarks. Usually, financial institutes will also give you a 30-day notice when interest rates are about to change. Therefore, whether you choose fixed or floating, you should still consider your refinancing options for your new homes and compare SIBOR vs SORA interest rates every two years.

Why is the mortgage interest rate increasing?

You might have noticed that interest rates are increasing, and home loans are also being affected. This is because Singapore is an “interest-rate taker”; in simple terms, our country’s banks have to keep pace with the interest rates in the United States. In June 2022, the US Federal Reserve aggressively raised its interest rates to curb demand, reducing inflation. The three largest banks in Singapore (DBS, OCBC and UOB) followed suit, leading to an increase in interest rates.

It’s simple – the higher the interest rates, consumers will borrow less money and slow their spending on housing or other goods. However, if you’re in the market for a new house because you need a new place to stay or are due for loan refinancing, you’ll need to brace yourself for higher interest rates.

How do I check mortgage interest rates?

When explaining a home loan to borrowers, banks tend to provide an amortisation schedule to explain how they structure your payments over the loan period. Amortisation means your monthly repayments are split across the loan tenure in chunks, allowing you to repay your interest and principal repayment simultaneously.

In general, the interest payment comprises the more significant portion of the monthly repayment at the beginning of the loan and will gradually decrease. This forecast allows homeowners to easily manage their home mortgage loan on a monthly basis.

Although the schedule is a forecast, it still helps the borrower to keep track of the interest and principal amount owed.

Can you negotiate an interest rate on a mortgage?

There might be some negotiation leeway if you take a home loan with a bank. However, if you take an HDB housing loan, you must follow the interest rate. Interest rates can impact your financial situation adversely if you don’t plan. Moreover, even if you take up an HDB housing loan, there’s no guarantee that interest rates will remain fixed forever.

What this means, then, is that new homeowners must consider their future financial situation, looking at age, lifestyle needs, and other responsibilities that they might have before buying a home. In addition, if you have dependents, it’s wise to consider mortgage insurance plans that can reduce the liability of mortgage repayments should something happen to you. After all, you don’t want a situation where your dependents are at risk of losing their house should the unexpected happens.

There are pros and cons to choosing either loan. Buy your first home with peace of mind without breaking the bank. Contact our friendly and experienced FAs for more advice now.

Protect Your Loans

It is imperative to note that Term Insurances are a way to protect your finances in the event of death, total permanent disability (TPD) as well as critical illnesses. This is to prevent the loan from becoming a debt if one party were to meet a death or TPD situation.

Contact us below in finding the most competitive and best coverage on mortgage term insurance.

We will guide you along on the financial protection while you buy your first home so that you can plan wisely for your future needs as well.

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