Are you paying more on your home loan than you should?

If you aren't aware yet, the world is currently going through a rising interest rate environment as Central Banks around the world try to tackle the rising inflation rate. This has a direct effect on mortgage loans

Singapore has the world's highest home ownership rate at almost 90 per cent. For many homeowners here, the recent rise in interest rate is a timely reminder to start looking into your mortgage, especially if you haven't been paying attention to it for the past few years. For a very simple reason. You might have been overpaying on your home loan.

Interest rate on Sibor-pegged home loan jumps more than 50 per cent in the past six months

If you haven't been monitoring your home loan for the last few years, it is very likely that your annual interest rate will be above four per cent by now. This is especially so if you are still pegged to the soon to be phased out Singapore Interbank Offer Rate (Sibor).

Those who are still on Sibor 3M home loans have had a rude awakening in the past few months. You would have seen the interest rate on your home loan going from sub — three per cent in September (only six months ago!) to more than four per cent today. This is the highest it's ever been for over two decades!

If this situation sounds familiar, you might be wondering just how much you are overpaying on your home loan!

How much more are you paying on your home loan?

Just to illustrate how much you will be saving if you were to switch to a more affordable home loan package, let's just take 4.50 per cent as the benchmark for comparison. Don't laugh, it wasn't that long ago that local banks were offering fixed rates above four per cent!

Let's assume you have an outstanding loan of $500,000. At an annual interest rate of 4.5 per cent, your monthly mortgage repayment is $2,533.43 for the next 30 years.

If you took the most affordable home loan today, the interest rate will drop to 3.68 per cent p.a. Your monthly mortgage repayment rate will be reduced from $2,533 to $2,296. That's about $238 less each month, or almost 10 per cent less!

And if you think 10 per cent less a month isn't much, just think about how much savings that would be over a single year. We did the math, it's $2,852.04. That's going to go a long way in funding a European holiday, or the latest MacBook Pro.

We're just using this three-year fixed package as an example. Standard Chartered also has options for one-year and two-year fixed packages.

What is the best home loan so far in 2023?

Currently, while interest rates are expected to continue rising in the near future, we expect them to eventually drop by the end of 2023 or by early 2024. Therefore, as of April 12, 2023, the most prudent option would be a one-year fixed package, such as the one being offered by Standard Chartered.

However, for various reasons, this package may not be appropriate for you.

Are there better home loans that I should know?

While interest rate is the primary consideration for most home loan, there are also other factors to consider such as loan term, special features, promotions, subsidies, penalties, etc.

ALSO READ: Should you pay off your existing home loan in 2023?

This article was first published in Mortgage Master.