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The dynamics of mortgage loan interest in Singapore

If you wish to build or buy your dream home, you might want to take a mortgage loan to finance the purchase of your home, considering the huge expense that you are going to incur. Having your own home through years of hard work, saving up and investing, is a prized achievement indeed. As a matter of fact, home loans are the most commonly availed loans after personal loans and car loans and they usually attract a lower rate of interest. However, considering that home loans have a much larger tenure, you’ll actually find yourself paying heavy interest over the many years of repaying your home loan. There are several banks that offer home loans in Singapore. The interest rates are more or less the same but some banks have a slightly reduced interest rate to make their offering more competitive. The Interest rate for home loans is dependent on factors including the tenure period, credit score, income, and more. Let us look at each of these factors and assess the bearing they have on mortgage loan interest rates.

Your loan tenure

Loan tenures, especially in the case of home loans, have a heavy impact on the amount of interest you’re going to pay the bank. Interest on home loans is a huge source of income for banks and in a majority of cases, you’d end up paying more than the principal amount towards the interest on your availed loan. Choosing the right tenure is perhaps the most important thing if you wish to pay a lesser amount towards interest on your home loan. While such is the case, choosing too small a tenure can get you embroiled in a deep web of financial uncertainty and instability, seriously denting your ability to live a contented life.

Depending on the amount that you wish to avail, home loan tenures can stretch up to 15-20 years in some cases. Longer the tenure, more the interest you’d be paying. In Singapore, home loan interest rates usually hover around 2%, which is starkly lower in comparison to many countries around the world. The Interest on home loans is basically of two types – fixed interest rate and floating interest rate.

What is the difference between fixed and floating interest rate?

A fixed interest rate on your home loan would imply constant monthly payments over the period of your loan tenure. Additionally, it would mean that your Monthly payments are insulated from market related interest fluctuations. A floating rate of interest on the other hand would mean that your monthly payments can differ from time to time and most likely be affected by market related interest fluctuations. The question of which of these interest offerings will ideally benefit your home loan is often posed by loan seekers. Well, let us try and answer that.

Banks offer both floating and fixed interest rates on home loans and customers are usually given the opportunity to choose a type that best suits them. Both types of rates come with their own set of advantages and disadvantages.

Let us take the case of fixed interest rates first. Usually, fixed rates are slightly higher than floating rates as they are isolated from any form of market dynamics that can negatively impact the markets, especially the home loan market. Moreover, a fixed interest rate would give you better understanding of how much you’d be paying throughout your loan tenure, helping you to plan your expenses and other aspects of your finances prudently. In select case, banks offer fixed rates for only some part of the loan tenure in order to factor in market dynamics.

Floating interest rates can be much lower than the original fixed rate offering on your home loan. While they are influenced by market dynamics, the rates can go much lower than expected, fittingly benefiting your cause in avoiding heavy interest payments. However, negative market influences can have a significant impact on floating interest rates and sometimes, although rare, can lead you to pay more interest than the fixed interest rate.

Your credit score and its impact on home loans

Credit scores are a rather fundamental premise in determining the approval or rejection of your home loan application. A low or dismal credit score would most likely mean that your loan application will be rejected. Prudent usage of credit cards is an effective way to improve credit scores. Also, if you’ve taken a personal loan but managed to make timely repayments, your credit score is certain to be at decent levels.

In some cases, banks go ahead and approve your loan application even though your credit outlook might not be all that impressive. In such cases, the interest you might be paying on your home loan might be slightly higher and you most likely won’t be given the option to choose the ideal interest rate package.

You annual income and its impact on your loan application

Most home loan offerings come with a minimum annual income eligibility criteria that has to be met in order to gain approval. This is dependent on the amount you wish to avail. While such is the case, different banks employ different standards in determining the eligibility criteria and disbursing the loan.

The above mentioned parameters influence the dynamics of mortgage loans and influence the rate of approval or rejection of home loan applications.