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How Much Do I Have to Pay If Interest Rate Rises?

The interest rates of the loan determine how much monthly payments you will have to come out for your property. In Singapore, we do not have fixed rate mortgages. Our loan could be fixed for a period of time, 3 years, and after that 3 years it would be an adjustable rate mortgage. The current property loans have very low interest rates. However, we may wonder, what if interest rate rises, how much more do I have to pay?

Singapore Interbank Offered Rate (SIBOR)


source: tradingeconomics.com

This chart shows the SIBOR rates since the past. SIBOR is the interest rates that banks in Singapore use when lending money to each other. The highest it had went is 9.84 percent in January of 1998. This is not the interest rate that you are paying as you still have to add the margin that is set by the bank. Interest Rate = Margin + Index(SIBOR). From the graph, SIBOR remains relatively low when there is no economic crisis.

What Rate to Use to Calculate Monthly Payment?

Monetary Authority of Singapore(MAS) came out with 3.5% for housing loans and 4.5% for non-residential property loans. This is for calculating the Total Debt Servicing Ratio(TDSR) for an individual. This should be the safe rate that MAS feels it would be if interest rates were to rise. Although current interest rates are lower, it would be better to use a higher interest rate to calculate affordability. Knowing how much you can stretch yourself can aid better planning as well.

Calculating Monthly Loan Payments

In this exercise, we will calculate the mortgage payments based on a fixed rate mortgage, it would be simpler this way. It is also accurate as you are inflating the interest rates and as long as the interest rate does not go more than your increased interest rate, your monthly payment will be lesser than what you had anticipated. If you want the real adjustable rate mortgage(ARM) calculation, you can check out my other post.

Property Price $1,000,000
Loan to Value(LTV) 80%
Down Payment $200,000
Loan Amount $800,000
Current Interest Rate 1.85%
Increased Interest Rate 3.50%
Loan Term 25 Years

You can use this mortgage calculator

With 1.85%: Your monthly payment is $3,332.73.

With 3.5%: Your monthly payment is $4,004.99.

There is an increase of $672.26 with a 1.65% increase in interest rate. As long as interest rate does not rise above 3.5% your monthly payment will be below $4,004.99. If you want to further stress test, increase the interest rate.

Conclusion

This exercise can be used to gauge your monthly payments. If you are unable to pay your loan, it could result in a default. However, with current low-interest rates, default cases are minimal. Furthermore, with couples both working and the ability to use CPF for mortgage payments, housing is much more affordable. Financial planning is important and with this calculation, you know roughly if you will be able to pay for the monthly loan payments.

 

Singapore real estate quiz

Can You Afford Your Monthly Loan Payment Quiz

Start this quiz whenever you are confident!

What is the interest rate that MAS request to use when calculating TDSR for residential loan?
3.5%
2.5%
4.5%
6%

Correct!

Wrong!

Using the above mortgage calculator. Find out the monthly payment for a property with price of $2million. 80% LTV. 25 Years loan duration. 2% interest rate.
$6,781.67
$4,683.34
$7,193.08
$5,881.45

Correct!

Wrong!

Select the answer which is the correct.
Mortgage interest in Singapore are fixed.
Mortgage interest in Singapore can be fixed for a certain period and will revert to adjustable.
Mortgage interest in Singapore only has an adjustable rate.

Correct!

Wrong!

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