Personal Finance

# How Is Housing Loan Interest Calculated In Singapore?

February 24, 2023

When it comes to taking a housing loan in Singapore, it is important to understand how the interest is calculated.

The interest rate on your housing loan will affect your monthly repayments and the total amount of interest that you will pay over the course of the loan.

If you are planning to purchase a home in Singapore, you will most likely need to take out a housing loan.

This makes it crucial that you understand how the interest rate on your mortgage is calculated, as it has a big impact on the cost of the loan.

To learn more about how housing loan interest is calculated in Singapore, read on.

## How Is Mortgage Interest Calculated?

The mortgage interest is what the banks will charge you for borrowing their money. It’s the cost of borrowing to buy your home.

Mortgage interest can either be fixed or variable. Fixed interest rates don’t change for a specified period, unlike variable interest rates, which depend on various factors.

Fixed interests are known in advance, while variable interest is communicated by the lender periodically. With fixed-interest mortgages, you know exactly how much you will pay every month.

Lenders who offer variable interest use the reducing balance method to calculate the monthly repayments.

In Singapore, banks use loan amortisation to come up with the loan repayment schedule. The loan amortisation schedule shows the borrower the following:

• Equated monthly installments (EMI)
• Monthly interest
• The principal payment they will make monthly
• The total cost of the loan

At the beginning of the loan repayment, a big chunk of the payment goes toward paying the interest. It’s therefore important that you understand how interest is calculated. This will help you make more informed decisions.

The best way to calculate the interest you will pay on your mortgage is to use a mortgage calculator.

A mortgage calculator makes it easy to see the impact of interest on your mortgage payment. For example, let’s say you take a \$700,000 mortgage for a loan tenure of 30 years at an interest rate of 4%.

Here is what your amortisation schedule is likely to look like:

YearPrincipal RepaymentInterest RepaymentOutstanding Balance
2023\$ 12,327\$ 27,776\$ 687,673
2024\$12,829\$ 27,273\$ 674,843
2025\$13,352\$ 26,751\$ 661,491

To calculate the mortgage interest, the lender will take the loan amount and multiply it by the interest and the number of years.

They will then divide the resulting figure by the number of months (loan tenure) to get the equated monthly installments (EMI).

The EMI is the monthly repayment you will make every month. To get the best result, it’s best to use the mortgage calculator. It will give you more accurate figures on the EMI and the interest amount per month.

If the interest rate remains constant, your monthly payments will remain constant. As you can see from the above, the interest amount is higher in the first year as compared to the rest. The amount going towards the repayment of interest reduces as the years go on.

## How Much Interest Do You Pay?

Mortgage interest is often one of the biggest costs associated with owning a home. The amount of interest you pay depends on several factors, including the type of mortgage, loan amount, loan tenure, and interest rate.

Here is a breakdown of how the factors affect the actual interest you will pay.

Type Of Mortgage

Your mortgage will either be fixed or variable. The interest rate for fixed-interest mortgages remains the same for a given period.

Lenders will offer fixed rates for a certain period to encourage borrowers to sign up for their products. The effect of a fixed mortgage is that the EMI remains the same for the period.

On the other hand, if you opt for a variable interest rate, the EMI depends on the rate. The main advantage of a variable interest rate is that in seasons where the interest falls, you will pay less on your mortgage.

Loan Amount

The higher the loan amount, the more interest you will pay. To reduce the interest you are likely to pay, consider making a larger downpayment. This will reduce the amount you need to borrow and the interest the lender will charge you.

Loan Tenure

A longer loan tenure increases the interest amount you will pay. Choose the shortest possible tenure.

A shorter loan tenure will require you to pay a higher EMI, but in the long run, it reduces the cost of the loan.

Interest Rate

The higher the interest rate, the more expensive the mortgage. This means you will pay more interest in the long run. It’s important to do your research and get the best interest rates.

Since the actual interest you will pay depends on several factors, the best way to determine how much you will pay is by using a mortgage calculator.

The calculator will give you the exact amount of interest you are likely to pay.

## Factors That Affect Mortgage Rates

Mortgage rates are an important factor to consider when buying a home.

After all, the interest rate on your mortgage will have a direct impact on your monthly payment. You must be aware of the factors that affect the interest rates on mortgages.

In this section, we take a closer look at each of these factors and how they can impact mortgage rates.

In so doing, you can improve your chances of getting a good mortgage rate. Here are the factors that determine the mortgage rates the lender will offer.

Credit Score

Your credit score gives the lenders an idea of how well you manage your debts. A lower credit score may attract a higher interest rate as the lender will view you as a riskier borrower. It’s therefore important that you work towards having a higher credit score.

Get the credit score report from the credit bureau in Singapore and see what you need to do before you apply for the mortgage.

Loan Amount

The loan amount you borrow may determine the interest rates on your mortgage. Some lenders may charge a higher interest rate on small mortgage amounts of the mortgage.

Large mortgages may attract a lower interest rate. It’s important to confirm how the amount you borrow affects the interest rate.

You can reduce the amount of mortgage you intend to borrow by making a larger downpayment.

Loan Tenure

A short loan tenure may attract a lower interest rate as the lender views you as a less risky borrower.

Check with the lender for the loan tenure and the interest rates. Compare the different loan tenures and choose one that suits your budget.

Interest Rate Type

Interest rates are either fixed or variable. Fixed interest remains the same over a period. The variable rates change over time.

In Singapore, the interest rates are based on the Singapore overnight rate average (SORA) after the phasing out of the Singapore interbank offered rate (SIBOR).

Most banks in Singapore offer the options of one-month compounded SORA or three-month compounded loan packages.

Depending on your choice, the interest on your mortgage will change monthly or quarterly. You can find the rates on the website of the Monetary Authority of Singapore (MAS).

The general interest rate is expected to rise.This means both fixed and variable rates may rise. However, since we don’t expect any downward trends in interest rates, it’s best to choose a fixed-interest mortgage.

## In Conclusion

It’s important for borrowers to understand how interest on their mortgage is calculated. This gives you an upper hand, as you can improve your chances of getting a better mortgage rate.

By improving your credit score, and choosing the right loan tenure and interest type, you will have a mortgage that serves your needs.

Consider paying a high down payment amount, as this will reduce the amount you will borrow and the overall cost of the loan.

Use the mortgage calculator to compare the various offers available and choose the right mortgage.

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