Interest rates (IR) have always have a significant impact to the real estate market. It is one key area which owners are concern since it directly affects amount of loan to pay each month.
Singapore has a relatively low interest rate ever since the 2008/09 financial crisis. With slightly over a decade of below 3% interest rate, everyone has expected the interest rate to rise. And then we are hit by the unexpected Covid-19, which led to interest rates diving back to way below 2% from the revision by Fed.
Most of the loan packages here which are directly linked to Sibor have seen a huge dip in their interest rates. (Easily from close to 3% to below 1.5%). But what does this mean for the real estate market? And more importantly for you as a home owner or a home-seeker?
How much more lesser?
For home-owners, a lower interest means lesser cost to pay every month. But exactly how much is being reduced per month? Let’s check out the difference for you.
Firstly, let’s analyse on the monthly payment difference for a flat of about $350,000 between 2.5% HDB Loan, 2% bank Loan and 1.5% bank loan. As a home-owner, you can save about $317 in their monthly payment by switching from a 2.6%IR HDB Loan to a 2%IR bank loan. That is about a difference of $131 on interest per month.
And if you are already on bank loan, though reducing 0.5%IR has a less significant savings about $63 monthly, you can still save $109 on interest monthly.
The total interest rates and spend ( down-payment+ interest ) for the $350K flat over 25 years are as follows. A drop in 0.5% IR (from 2% to 1.5%) can save you about $18,000 in their interest and spend.
For Private Residential Homes
Next, let’s check out how the different interest rates impact on monthly mortgages and interest for private homes too.
With the reduction of interest rates in current market from above 2% to about 1.3%, you as a home-owner, can save about $446 monthly in loan repayment. And the savings in payment to interest is about $750.
Over a period of 30 years, the savings on interest can be about $160K. While we know that interest rates are not going to be permanently at this low rate, this does show us how the different rates can impact you with a similar purchase price.
You can definitely consider switching their package if you are currently paying a higher interest rate.
Impact on home-seekers or purchasing decision
But of course, if you are currently home-seeking, you may have different aims. The lower interest rate may have different impact for you.
- For home-seekers who are looking for own stay, you definitely need a home. With a lower interest rate would equate to a lower cost given the same purchase value. You may prefer to commit to something now given the market is still quite resilient, and can still lock in an attractive interest rate package. After-all you are going to get a place sooner or later.
- For the investors type of home-seekers, the lower interest and payment can mean future higher capital gains and rental returns. Hence it is an attractive reason to jump the band wagon. Especially if the market is still quite robust with not much pricing corrections. Lower interest rates can equate to higher capital and rental returns. But of course, you must also check out the financial affordability before making that commitment.
- For home-seekers for flats, you may be geared towards bank loan with a more attractive interest rate.
While it may be most tempting to jump on the band wagon, please do bear in mind the low interest rates are not permanent. It is important to do a thorough financial checks before committing. Understanding both the pros and cons and the risk factors that come along with it.
If you still prefer professional assistance on going through the financials before making the switch or deciding to hop on the band wagon, feel free to get in touch with us. We can help you decide better with our risk analysis method.