6 Myths of Mortgage Interest Rates

Buying a property is one of the most significant investments an individual can make. 

In Singapore, purchasing a home is no exception. It requires considerable research, planning, and budgeting, which can be overwhelming, especially for first-time homebuyers. 

One of the essential aspects of buying a property is understanding the mortgage interest rates. Unfortunately, several myths about mortgage interest rates can mislead buyers. This article will discuss six common myths about mortgage interest rates in Singapore and how they will impact you.

Myth 1 - My mortgage payment doubles when the interest rate doubles

One of the biggest myths among homeowners is your mortgage payment doubles when the mortgage interest doubles. While your mortgage does increase when the interest rate climbs, it will not double when the interest rate doubles. 

For example, if you take up a $750,000 loan for purchasing your property at a rate of 2%, your monthly instalments will be around $3,178. 

When the interest rate doubles to 4%, the monthly instalments will adjust to around $3,958 — a difference of $780.

However, there is a big difference in how much of your monthly payments go into paying interest.

Taking the above example, at 2% interest, $1,250 of the monthly payment goes into paying interest, and $1,928 goes into your principal. About 40% of the payment goes into interest.

At 4%, $2,500 of the monthly payment goes into paying for interest, and only $1,458 goes into your principal. It means more than 60% of the payment goes into interest!

So instead of owning more of the property, you are paying more to the bank in interest payments.

Myth 2 - The interest rate will remain high for a long time!

That is also false. 

Over the past 20 years, the average interest rate is around 1-1.5%. Historically, interest rates usually drop back to below 1% within 2.5-3 years as economic growth suffers and central banks resort to rate cuts again - a cycle that has repeated itself many times.

Also, depending on your current mortgage package, when the interest rates come down, you can likely refinance into another mortgage package that has a significantly lower interest rate.

Myth 3 - I should always go for fixed-rate packages 

As good and secure as it sounds, blindly getting into a fixed-rate mortgage package with a lock-in period without understanding the current economic situation is to your detriment. 

For example, if the mortgage rates were to reverse and start heading down, you would not be able to take advantage of the situation and might end up paying a higher mortgage rate. If you were on a floating-rate mortgage package, your interest rate would adjust according to the situation, and you might end up paying a lower interest rate on average.

Myth 4 - I should not buy a home when interest rates are high

If you need a home for your family, you will have to purchase one. Either that, or you would have to rent. ( See Renting vs Buying a Home in Singapore, the true cost )

What matters is whether you are comfortable with the monthly mortgage payments and whether you can qualify for the loan amount you need for your purchase.

The value of a property is not directly correlated to the rise and fall of mortgage interest rates.

A good property you buy now will continue to increase in value, while the wrong property will take a turn, no matter if interest rates are high or low.

If you are buying a property for investment, consider the higher cost and weigh whether the investment will be worth its returns.

Do so using an investment calculator that factors in all the expected costs of owning a property for investment. Include expenses like agency fees, taxes and maintenance costs for the property, as this reflects the actual numbers behind your investment.

Do not base your investment purely on rental yield.

( Thinking of buying a property for investment? Get your Free property investment consultation here! Understand the facts and figures before deciding which property to invest in. )

Myth 5 - All banks use the MAS recommended 4% interest rate to calculate home loan qualifications

While MAS has dictated that a 4% interest rate is to be used to calculate the home loan eligibility of individuals based on the TDSR and MSR framework, some banks are adjusting their base interest rate for the calculation to 4.2% or as high as 4.5%.

This will negatively impact the amount you can loan based on your income.

Always approach a banker or mortgage broker to do an IPA for your home loan to have an accurate estimate of the loan amount your bank is willing to offer to you.

However, take note having an IPA is also not a guarantee that the bank will extend the total amount of the loan to you. Other factors like your credit score and whether you can provide complete documentation for the loan application will affect your final approved loan amount.

Myth 6 - You should always choose the lowest interest rates

Another common myth about mortgage interest rates in Singapore is that you should always choose the lowest interest rate. 

While it's true that a low-interest rate can save you money in the long run, it's not the only factor you should consider when choosing a mortgage. Other factors that can affect your overall cost include the loan tenure and other fees and conditions that may be attached.

For example, a loan with a lower interest rate but higher fees may cost you more than a loan with a slightly higher interest rate and lower fees. Therefore, comparing different mortgage packages and considering the overall cost before deciding is essential.

Some banks also provide unique mortgage packages that tie into your banking needs and how much funds you have parked with the bank.

Some of these packages might save you more money even if the interest rate is higher.

Speak to your mortgage broker and bankers to identify which mortgage package fits your financial needs.

Conclusion

Remember that mortgage interest rates can vary depending on market conditions, the lender, and your financial situation. It would help if you also were cautious when refinancing and negotiating a mortgage. By understanding the myths and facts about mortgage interest rates, you can make the best decisions for your financial future and enjoy the benefits of owning a home in Singapore.

If you want to learn more about how interest rates or other financial considerations will affect your property purchase, contact us for a non-obligatory consultation here.