Generally, buying a house remains as one of the top priorities for Singaporeans. It is a key milestone achieved when you hold the keys to your own house. As with most big-ticket items, a loan would likely be necessary.

The vast diversity of the mortgage options can cause borrowers to be lost in confusion – fretting over how to have a holistic comparison of mortgage offers across banks. Is it as simple as summing up the total interest payments and miscellaneous costs – fire insurance fee, legal fee, MRTA, etc. over a fixed course of time? Sadly, that is not the case.

For example, Bank A offers a fixed interest rate of 1.58% for the first two years, followed by 1-month SIBOR plus 1%. With SIBOR currently pegged at 0.81%, the third-year interest rate works out to be 1.81%. The three-year interest rates will then average out to be 1.66%. A seemingly cheaper option compared to what Bank B is offering – a fixed rate of 1.68% for the first three years. However, this is based on the assumption that SIBOR does not change in the span of the three-year time frame, which is highly unlikely as interest rates are constantly fluctuating. In view of the trend of rising interest rates, should SIBOR increase by over 0.5%, Bank B’s offer will be much more attractive.

Does this mean that borrowers should favour fixed rate over floating interest rates? To answer this question, we need to consider a few factors below.

- Are the owners planning to sell the unit in the coming 1 year, 2 years or 3 years? A short holding period means a floating package without lock-in period or a package with a waiver of penalty in case of sale.
- Is the client able to take some controlled risk and set aside a reasonable amount of cash and/or CPF money in case of interest rate increase? If the client is, a fixed deposit pegged rate is suitable to consider as the benchmark is more stable than SIBOR and with a certain level of transparency. Otherwise, a fixed rate package is more suitable for the client as his/her risk appetite is small.
- As SIBOR is affected very much by US Federal Reserve rate which is already set to increase gradually, therefore, it is less preferred by housing loan borrowers since 2015.

For example, a client needs to refinance a loan of S$1,000,000 with a tenure of 25 years. He plans to stay on the property but he may consider selling the unit if a good offer comes along. He has a few offers of loan packages on the table.

**Package A:**30% throughout loan tenure with 2 years lock in period (i.e. if he sells the unit in the first 2 years, a penalty of 1.5% will be charged). This is pegged to the bank’s fixed deposit rate.**Package B:**A 3-year fixed 3-year lock package of 1.48%, 1.58% and 1.68%, but there is a waiver of penalty only if the loan is redeemed due to property selling**Package C:**A no-lock-in package of 1.8% throughout, pegged to the bank’s own fixed deposit rate

*Source: HugMortgage*

From the above samples, we can draw the conclusion that if the property was to be sold in the first 2 years, package B is the best. Whilst if the property is sold in the third year, package A is the best – assuming no interest movement. In a setting where interest rates are expected to rise, fixed rates are favoured by the market. However, the costs may change in favour for package C if the interest/loading slapped by banks in case of promotions after the lock-in period of 2 years as the client could change to another package at a lower rate. Therefore, homeowners should review their mortgage packages from time to time.

With the upcoming interest rate hike forecast, more people are looking to lock down a fixed rate mortgage loan for the next two to three years. With current 2-year fixed rate mortgages averaging around 1.6%, what does this mean for your monthly repayments? Assuming a mortgage loan of S$1 million with a 2-year fixed rate of 1.6%, the monthly repayment works out to be S$4,047. It can take up to 25 years to pay off your mortgage. A further breakdown of the numbers shows that S$1,333, which equates to 33% of each monthly repayment, goes towards interest. The same 2-year fixed rate package adopts the bank’s fixed deposit rate at the end of two years, which means it transitions into a floating rate thereafter. Floating rates involve a certain level of risk as it is dependent on the SIBOR (Singapore Interbank Offered Rate) level and economic situations at that time.

It is important to select the optimal interest rate as it contributes significantly to how soon you can pay off your mortgage. Based on the earlier example, S$1,333 of monthly interest amounts to a total of S$214,000 worth of interest paid in a 25 years loan tenure, which is no small figure. Understandably, interest payment is unavoidable in a mortgage loan, but you can reduce the interest cost by comparing and staying up-to-date with the latest mortgage packages available for refinancing. It is also important to note that usually, banks will not charge a penalty which is 1.5% if borrowers refinance their mortgages after two or three years.

*Source: Department of Statistics Singapore*

Based on a study done by the Department of Statistics Singapore, it states that household expenditure has been increasing by 4.4% per annum from 2007 to 2013. The Public Utilities Board (PUB) has also recently announced a 30% increase in water bills with effect from 1 July 2017. With higher monthly expenses, it is increasingly crucial that care is taken to select the best mortgage loan to refinance every three years. With data from the Department of Statistics Singapore showing that mortgages account for around 74% of the total liabilities of a Singaporean household, money saved from a smart refinancing move can be better spent on other areas.

In summary, refinancing a mortgage is an imperative move for cost savings. As for fixed and floating rates – one is not necessarily better than the other. Factors like the current economic condition, market trend direction of interest rates, US Federal Reserve rate tread and individuals plans towards the property/mortgage should all be considered when SIBOR is a major benchmark in Singapore lending market. By rule of thumb, borrowers should evaluate each mortgage offer as a whole periodically and do a net savings sum for a period that they will hold onto the new mortgage package. Change is the only constant and it pays to compare mortgages as banks offer good packages along with market changes and peel competition.