In fact, at this point in the interest rate cycle, everyone really should be going for floating be it for purchase or refinancing. However, unknown to many, we like to highlight the benefit of a no lock floating rate which is especially useful for new purchase home loans. Read on.
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The recent news has been about resurgence of covid-19 in many countries. The fear is now of an even bigger second wave of the virus as the colder months of northern hemisphere approaches, and the ensuing possibility of a double-dip global recession. Whether that materializes no one can be absolutely sure. But it does underscore one thing – economic recovery and hence the path of interest rate from here is not going to be linear.
It is the view in this blog that interest rate will stay subdued for many years just like how it turned out post financial crisis of 2008.
Interest rate plateaued for many years in the US as inflation simply became non-existent which bewildered the US Fed so much as to cause a paradigm shift in its policy going forward. The central bank will now allow inflation to overshoot 2% for a good number of years, if that happens at all.
In such an interest rate environment at least for the next few years, we have argued that there’s simply no reason to pay a premium for higher fixed rates. This premium, or the gap between fixed and floating, looks to be settling at 0.20% at the moment. For an average private property home loan of $700,000, that’s a very decent interest savings of $1,400 per year or almost $3,000 over the typical two-year lock-in period on a floating rate home loan. We believe just like back in the period 2009-2014, many will soon learn at the end of their lock-in period that interest rate simply does not rise up fast, if at all. Simply put, you will be overpaying on fixed rate.
We’ve seen a surge of purchases after the re-opening of the economy in Singapore, which we’ve given our caution. For those who feel strong enough to commit financially to a new mortgage, here’s another tip we like to share – there’s no better time to go floating on a new purchase home loan than now. We’ve already explained the key rationale for choosing floating rate.
But there’s at least one other benefit – you could sign up for a “No Lock” home loan package and stretch the tenure when you refinance or reprice shortly after purchase!
Unknown to many, there’s at least one bank that offers a small interest loading of 0.15% to make its home loan packages no lock, instead of the usual two years lock. Speak to our team of consultants to find out more. Adding that 0.15% would just about bring the final interest rate you pay to 1.30-1.40%. Fairly reasonable rate akin to a fixed rate. But it comes with no lock-in which allows you to refinance as soon as 6 months (sometimes earlier) after purchase. That allows you to stretch the tenure by another 8-10 years until the age of 75 (instead of 65 at the point of purchase). Doing that means you will ease up on your cashflow with a lower monthly repayment to service using the rent (for investment properties).
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I take this chance to explain the general misconception people have about stretching tenure. Yes, you do pay more interest every month as the interest component in the instalment goes up. And you also pay more interests to the bank if you service the mortgage to the very last year of a typical outstretched 30-year mortgage tenure (maximum in Singapore is 35 years). In reality, how many of us actually do that? It is estimated that on average most people move house or sell a property within 10 years in Singapore. I believe it could be even shorter for investment properties.
How much is the additional interest you would pay for a longer tenure? Let me show you the breakdowns using a $700,000 loan and assumed an average interest rate of 1.50% over the long term, and varying just the tenure. 20 years would mean a monthly mortgage of $3,378. Let’s assume we can stretch it by 10 years to a 30-year tenure which would bring down the monthly commitment by about 30% to $2,416. This stands a better chance for the monthly rent collected to be able to pay off the mortgage completely or most of it. Now let’s take a look at the amortisation:
Looking at the two amortisation tables above, if you add up the total interests paid over the first 10 years of the mortgage, this works out to be $81,516 and $90,542 for the 20-year and 30-year tenure respectively. This is about 11% more. Since no one sells a property within the first 3 years of purchase to avoid paying hefty SSD (seller’s stamp duty), we tabulate the total interest costs paid from the 4th to 10th year as follows:
|Total Interests Paid||20-year Tenure||30-year Tenure||Increase ($)||Increase (%)|
|By Year 4 (2024)||$38,400||$39,783||$1,383||3.60%|
|By Year 5 (2025)||$46,823||$49,004||$2,181||4.65%|
|By Year 6 (2026)||$54,761||$57,927||$3,166||5.78%|
|By Year 7 (2027)||$62,207||$66,547||$4,340||6.97%|
|By Year 8 (2028)||$69,153||$74,859||$5,706||8.25%|
|By Year 9 (2029)||$75,592||$82,859||$7,267||9.61%|
|By Year 10 (2030)||$81,516||$90,542||$9,026||11.07%|
Indeed, you will pay more interests over time. But not a lot more. The longer it takes for you to sell the property, the more interest you will pay. You would have paid $9,000 in additional interests if you manage to sell only after 10 years. However, if you end up selling the investment property soon after the SSD period, this additional interest is just $1,300-2,000.
Even paying $9,000 more interest to service the outstretched mortgage for 10 years, that works out to be just $900 more per year or $75 per month. I am sure most investors would agree that is an acceptable cost – in order to lower the monthly instalment by 30% so that the rent can cover it. Not forgetting you are also keeping your monthly cashflow to generate higher returns elsewhere.
So, for those looking to buy their first investment property in Singapore, speak to our experienced team of mortgage consultants today for a no-lock floating rate home loan! And there’s no better time to try floating when rates are not expected to move over the next few years.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals. So, be it to refinance home loan, buy your next Singapore condo or even review your commercial property loan, speak to our dedicated team of mortgage consultants here for the best Singapore home loan rates.