You may have seen that the interest rates of HDB loans have always been higher than bank loans. This trend is witnessed for years. But things are about to change now. The recent increase in the interest rates in US to fight rising inflation is the leading cause behind this. This article will showcase how this rise in interest rates will affect the Singaporean real estate and the associated loans:
Increase in Rental Rates
Landlords will surely increase the rent rates as a result of this increase in interest rates. But this is not solely the reason for such an increase in rental rates. Recent rise in property taxes also contributes to this expected spike in rental rates.
Increased Interest Rates for EC Buyers
This spike in interest rates won’t mainly affect HDB loans, as their figure will remain at 2.6%. Taking this point into consideration, those who are associated with HDB loans are likely to exercise relief from these spiking interest rates.
Executive Condominiums (ECs) are never entertained by HDB loans. You have to deal with bank loans to buy or upgrade your EC. Therefore, you must be prepared to deal with the increasing interest rates.
And make no mistake; your bank loan repayments would increase a lot over the same loan tenure as a result of these increases interest rates.
Prolonged Loan Tenure
There is one thing which needs the most attention in such circumstances. That thing is tightened Total Debt Servicing Ratio (TDSR) that was carried out in December 2021 from 60% to 55%. According to this policy, you cannot spend more than 55% of your monthly income on home loans and other debts.
Merging this tightened TDSR limit with the rising home loan rates, now it would be difficult for many people to remain within the limit of TDSR with such home loan rates. It does not matter whether you were lying within the TDSR limits before or not. The upgraded home loan rates can give you a tough time in making it possible now.
The end result will appear in the form of prolonged loan tenures or hefty down payments. Both of the scenarios are difficult to manage for someone who was witnessing cheaper home loan interest rates for years.
Here is a quick sneak peek into the latest TDSR reductions and Additional Buyer Stamp Duty changes in effect from December 2021:
- TDSR limit of 55% of your monthly income.
- ABSD raise to 17% for Singapore Citizens buying their second residential property.
- ABSD raise to 25% for Singapore Citizens buying their third and subsequent residential property.
- ABSD raise to 5% for Singapore Permanent Residents buying their first residential property.
- ABSD raise to 25% for Singapore Permanent Residents buying their second residential property.
- ABSD raise to 30% for Singapore Permanent Residents buying subsequent residential property.
Consider Prepayment Option
Now this is obvious that home loan rates will surely increase sooner. If you are almost at the end of your home loan tenure and want to spare yourself from these new interest rates, then there is an option for you to make prepayments right away.
This will pay off your entire remaining bank loan amount, thus saving you from monthly repayments with higher interest rates and even prolonged loan tenure if you don’t fall within the 55% TDSR limit.
The Bottom Line
Singaporeans will witness this year something new when it comes to bank loan interest rates. Long gone are those days when you knew that bank loans are cheaper than HDB loans and won’t change for a long period. That time has come.