Higher interest rates aren’t deterring property buyers, but a lower borrowing cap could
Higher interest rates aren’t deterring property buyers, but a lower borrowing cap could. In his National Day message, Prime Minister Lee Hsien Loong stated that the globe is “unlikely to return anytime soon to the low inflation levels and interest rates that we have enjoyed in recent decades.”
Such prospects should give multi-property owners a lot to think about – and be concerned about. Prof Sing believes that even a 1% increase in interest rates might have a “substantial impact” on monthly payments for homeowners, depending on the amount borrowed from banks. A 30-year S$500,000 loan at 1% annual interest would result in a monthly repayment of S$1,608, according to MoneySense’s mortgage calculator.
When loan rates reach 3%, monthly repayments climb by 31% to S$2,108, which is much more than most people can expect in yearly wage growth. If interest rates rose to 5%, the borrower’s monthly installments would rise by S$2,684 – a 66.9% increase. While this could be incredibly pricey, it is also important to examine the impact on the loan’s amortisation schedule, in addition to the immediate impact on one’s monthly cashflow.
Borrowers will be influenced by the weightage of principal reduction and interest components in monthly repayments, according to Darren Goh, general director of MortgageWise.sg. “When the interest rate is 1.5 percent, as many of us are used to,” he added, “you see your loan drop down very quickly, since… roughly 70% of what you pay every month reduces your loan and only 30% is interest.” “If it’s 3.5%, the pendulum swings back.” Despite the likelihood of an increasing debt burden, many market observers appear unconcerned for the time being. According to MortgageWise data, bank floating rates varied from 1.9 percent to 2.1 percent in early August.
Singapore home loans’ stringent borrowing restrictions will also keep this in control. Homebuyers in Singapore are subject to a total debt servicing ratio (TDSR), which restricts total debt payments to 55% of income. To compute this ratio, multiply mortgage liabilities by 3.5 percent or the current market rate, whichever is greater. “The TDSR acts as a cushion or buffer against overextending leverage,” explains Leonard Tay, head of research at Knight Frank Singapore. “They have the buffer for interest rates to rise without crippling their financial status.”
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