Mr Kevin Ong, 46, is growing increasingly concerned about money. On top of higher daily expenses because of inflation, he was hit with another whammy: Higher mortgage payments.
His three-year fixed rate loan term at 1.61 per cent ended earlier this year.
He was offered an adjusted rate by his bank – at about 30 per cent more than what he had to pay every month.
“I was very affected by it because it makes a big difference. It’s additional monetary stress,” says the creative director, who is single and lives in a studio apartment in Tanjong Pagar.
Fixed home loan rates in Singapore hit a new high of 3.85 per cent on Tuesday. Since the start of 2022, interest rates offered by private financial institutions in Singapore have been rising as lenders take their cue from the US Federal Reserve. The US central bank has been aggressively raising its benchmark interest rates in a bid to tame the worst inflation it has seen in 40 years.
Singapore introduced a slew of property cooling measures in September to ensure prudent borrowing and prevent defaults from overstretched borrowers unable to service their loans as interest rates continue to rise.
For property loans from private financial institutions, the medium-term interest rate floor used to compute the total debt servicing ratio (TDSR) and mortgage servicing ratio (MSR) was raised by 0.5 percentage points.
TDSR refers to the portion of one's gross monthly income that goes towards repaying all monthly debt obligations, while MSR is the portion used to pay property loans. MSR is only applicable to loans for Housing Board flats.
“The sustained surge in interest rates and persistent market volatility are eroding the value of our customers’ savings and upending their financial plans to take care of their everyday and long-term needs,” says Mr Jeremy Soo, managing director and head of Consumer Banking Group (Singapore), DBS Bank.
Find ways to save
So what can borrowers like Mr Ong do?
“Regardless of which loan packages they are on, consumers with mortgages have to re-assess their consumption and spending habits amid high inflation,” suggests Mr Soo.
Where applicable, fixed rate packages will offer borrowers more stability when making mortgage payments, especially with the expectation of further Fed rate hikes, he adds.
Unsatisfied with the adjusted rates offered by his bank, Mr Ong decided to shop around for a new home loan package. He spent weeks doing research – looking for the best rates and packages, and evaluating how he could save after deducting costs like legal charges and valuation fees – before deciding to refinance his loan.
“It was mentally exhausting, because there are so many steps and considerations, and I had to do all this on top of my daily work. But I’m glad I did it,” says Mr Ong.
After refinancing his fixed rate loan with DBS, he will save about $300 every month compared to what he would have had to pay if he had accepted the adjusted rate.
Earlier this month, the bank launched DBS HomeSaver to enable borrowers with POSB Save-As-You-Earn and DBS Multiplier accounts to earn higher interest.
To illustrate, the bank gives the example of a customer who has a monthly salary of $6,200 and a balance of $50,000 in their DBS Multiplier account. By depositing $1,000 into their POSB Save-As-You-Earn account and spending $1,000 each month with their POSB/DBS credit cards, they would earn over $400 in interest by the end of a year.
This amount increases to over $1,500 if the customer signs up for a home loan and mortgage insurance plan with the bank, due to the higher interest rates and a one-time cash bonus of $700.
“We are cognisant that home loans are one of the largest and longest financial commitments that greatly impact a customer’s cash flow,” says Mr Soo. “So we are doing more to help our customers to not just own their homes but also capitalise on opportunities to accumulate cash while they save.”
The bank also launched the POSB HDB home loan package, pegged at 0.1 percentage point above the prevailing CPF Ordinary Account (OA) rate of 2.5 per cent – similar to the current HDB concessionary loan rate. The package is exclusively for individuals who earn less than $2,500 a month. They are among those most vulnerable to inflationary pressures, according to data from a DBS study released in August.
“Our POSB HDB home loan offers this group of borrowers more stability compared to other floating rate home loans on the market, and we have made it eligible for those who had previously taken up two or more housing loans from HDB,” says Mr Soo.
He adds: “On top of the competitive POSB HDB home loan rate of 2.6 per cent, successful applicants can also enjoy the added benefits of the DBS HomeSaver scheme, which pays higher interest and additional cash bonus.”
Buffer before you suffer
You may have heard this advice many times: Build an emergency fund with at least six months’ worth of expenses.
But Ms Evy Wee, head of Financial Planning, Investments and Insurance Solutions, DBS Bank, recommends those with financial commitments like a home loan to have more as a buffer.
“Regardless of interest rate trends or choice of home loan packages, we strongly advise borrowers to set aside sufficient funds as a buffer in case of further interest rate hikes or any unforeseen circumstances,” she says.
“Ideally, one should also set aside savings in cash or liquid assets that can be used to pay for their monthly home loan instalments for the next two years,” says Ms Wee.
This would give you sufficient time to restructure your loan if needed, or even sell the property should you run into any financial issues.
To better fight inflation, Ms Wee encourages people to leverage higher interest-yielding savings tools. She gives the examples of the bank’s savings accounts like the POSB Save-As-You-Earn and DBS Multiplier, as well as options like the Singapore Savings Bonds (SSB), endowment insurance plans or money market funds.
Individuals should also proactively review their expenses and financial goals regularly, and set up a holistic financial plan that includes a diversified portfolio.
Those who are DBS or POSB customers can make use of the DBS NAV Planner, the bank’s digital financial and retirement advisory tool. Through the NAV Planner, they can put together a customised budget with saving and spending targets.
The advisory tool, powered by artificial intelligence, also helps to identify and close insurance and investing gaps, or even project income flows.
This is the third of a four-part series titled "Win the race against inflation", in partnership with