As the saying goes: What goes up must come down, and the reverse is true as well. So be prepared—mentally and financially—for a day where interest rates will climb once again. Will you be able to manage the mortgage then?

To help home owners and investors with the decision-making process, we map out the types of housing loan packages available in Singapore today. We also look at historical data to help you analyze your options at this juncture.


Fixed Rates and Variable Rates
Housing loan packages in Singapore can be broadly defined into two categories: fixed rates and variable rates.

1. Fixed Rates: A fixed-rate loan locks the interest rate for the first few years. Subsequently, the interest rates will be variable and typically benchmarked against a reference rate (often referred to as floating rates). In Singapore, the lock-in period is usually three years, and sometimes, five years.

There are three drawbacks, however, of this option:

• This is often the most expensive option, as it offers security and a peace of mind that you will be protected against potential interest rate hikes.
   
• Be aware of the early repayment charge or redemption penalty. By guaranteeing a fixed interest rate, financial institutions (FIs) actually bear more risks for the volatility and uncertainty of the market interest rate. To compensate, they would typically charge borrowers more money if they repay the loan before the end of the fixed rate period, these periods are also known as loyalty periods. Sometimes, these charges can carry on for a time (called extended tie-ins) even after the fixed rate period ends. An example of a common loyalty period is 1 year and breaching the agreed period incurs a penalty of typically 1-1.5% of the outstanding loan.

• Take note of the claw-back period. FIs sometimes offer discounts, subsidies, and other perks to entice borrowers. The downside is that during this period, you cannot fully repay the loan without paying back for these ‘goodies’.

As a result, this loan package is most suitable for those who want certainty over their cash flow and are unlikely to sell their property within the next three to five years.

2. Variable rates: There are two things to note:

There are two types of variable rates—board rates and published rates.

Board Rates

These rates will change during the loan tenure. There is a premium that will be added on top of the variable rate. This is usually fixed and is set by the individual FI

The FIs set the board rate, and they often do not reveal how they arrive at the figure. This rate may not fall in tandem with the Singapore Interbank Offered Rate (SIBOR), which is the lending cost between local banks.

Published Rates
 
To counter this lack of transparency, FIs introduced packages that are pegged to published rates, which include:

• SIBOR, which moves in tandem with market conditions thereby providing a certain level of transparency to the consumers who can look at market trends to confirm the rates they are paying are genuinely tied to the economy.
   
• Singapore Swap Offer Rate (SOR) represents the average cost of funds used by banks in Singapore for commercial lending, or the cost of borrowing SGD by borrowing USD for the same tenor and swapping the USD in return for the SGD.
   
• CPF Rate

The upside is that regardless of whether the rate moves up or down, borrowers can be sure that they are paying based on transparent market rates.

Variable vs Fixed Interest Rates
Real estate investors who need financing to purchase property will inevitably be faced with the choice of variable or fixed interest rates. However, the volatility of interest rates does not allow anyone to predict future trends. The best way to make your decision would be to keep abreast of the latest economic happenings and political situations by reading the newspaper, business magazines and market reports in order to develop a better understanding of the market.