The era of low-interest rates is over (at least in the near future). We have enjoyed low-interest rates for over a decade, but to control inflation, the US Federal Reserve is increasing interest rates. If you were risk-averse and went with an HDB loan, you will not be affected. But if you were attracted by the low-interest rates of HDB bank loans, you might be in for a rude shock when you next refinance. This rise in interest rates will mainly affect existing HDB bank loan lenders and future and existing private property buyers. Future public HDB buyers should be able to rely on the fixed 2.6% HDB loan, while private property buyers don’t have a choice either way. In this article, we will look at how the rising interest rates will affect individuals and families that choose to go with an HDB bank loan.
Disclaimer: All comments on this blog site are an expression of opinion. You are recommended to consult with a licensed, qualified financial advisor before making any financial decisions.
Rising Interest Rates
Although there was an increase in interest rates from 2015 to 2019, they quickly went back down to zero during the pandemic. On the 4th of May, Jerome Powell, the US Federal Reserve Chairman, announced that there is a 0.5% increase in interest rates to 0.75 – 1%. The US Federal Reserve has a target of 1.9% in 2022 and 2.8% in 2023 and 2024 and will be looking at possibly increasing interest rates by 0.5% each time. Although this is the estimated forecast, we should be ready for any unexpected movements, especially up.
Looking at the last 40 years, the interest rate was above 4% about half the time. The current bank rates have increased significantly and are now close to the current HDB loan rate of 2.6%. I estimate that it will exceed 2.6% by the end of the year. We have been too used to low-interest rates and assumed that they would go on forever. If you have made financial decisions based on this assumption, it is time to reevaluate how the rising interest rates will affect you.
HDB Bank Loans – It Is A One Way Street
If you have taken an HDB bank loan, you should already know that it is a one-way street. One is able to convert an HDB loan to a bank loan but not the other direction. Once you have decided on an HDB bank loan, you will not be able to get out of it when interest rates rise unless you sell off your property.
It also boils down to whether you think that the interest rates will go up and remain there in the next few years. You will win out by taking an HDB bank loan if the interest rates go back down in the near future.
If you are still considering whether to take a gamble and go with a bank loan, be prepared that the rates after your lock-in period will potentially be quite a bit higher than the HDB loan rate.
How Much More Should You Expect To Pay?
Since an HDB bank loan is greatly affected by interest rates, here are some estimates on how much should you expect to pay when interest rates rise.
| Loan Quantum | Total Interest Paid (Monthly Payments) | |
| 1.5% – 25Y | 2.5% – 25Y | |
| S$200,000 | 39,961.80 (799.87) | 69,170.04 (897.23) |
| S$350,000 | 69,933.14 (1,399.78) | 121,047.57 (1,570.16) |
| S$500,000 | 99,904.49 (1,999.68) | 172,925.10 (2,243.08) |
| Loan Quantum | Total Interest Paid (Monthly Payments) | |
| 3.5% – 25Y | 4.5% – 25Y | |
| S$200,000 | 100,374.14 (1,001.25) | 133,499.49 (1,111.66) |
| S$350,000 | 175,654.75 (1,752.18) | 233,624.10 (1,945.41) |
| S$500,000 | 250,935.36 (2,503.12) | 333,748.72 (2,779.16) |
| Interest Rates | Total Interest Paid | Monthly Payments |
| 1.5% to 2.5% | 73% increase | 12% increase |
| 2.5% to 3.5% | 45% increase | 12% increase |
| 3.5% to 4.5% | 33% increase | 11% increase |
| 1.5% to 4.5% | 234% increase | 39% increase |
Looking at the interest rate forecasts, although the increase in monthly payments is “only” a few hundred dollars, one can expect to pay significantly more in interest. For example, if the interest rates increase from 1.5% to 4.5% the total interest paid will be about 234% more. The interest payment on a S$500,000 loan will increase greatly from S$99,904.49 to S$333,748.72, about 66% of the original loan amount. If your loan quantum is bigger, especially for private properties, the interest rate increase will hit you even harder.
Realistically, it will be somewhat lesser as you will have a shorter loan tenure at the higher rates.
HDB Bank Loans Becoming Unaffordable?
Photo by Emil Kalibradov on Unsplash
The stability of a country is linked to homeownership. We know that mortgage payments make up about 70% of a household’s total debt. What will happen if the increases in interest rates make it difficult for a household to repay their HDB bank loans? Although we can use our CPF to pay for the monthly mortgage payments, it might not affect our cash on hand situation, it will affect your retirement. With a smaller Retirement Account, your future cash flow from CPF LIFE will be affected to a certain extent.
| Loan Details | S$350,000 loan at 4.5%, 25 years |
| Monthly Payment | S$1,945.41 |
| Median Salary (2 pax) | S$4,000 x 2 |
| CPF OA Contribution (2 pax) | S$1,840 |
| Net CPF OA Balance | Negative S$105.41 (S$52.71 per pax) |
It is also a possibility that the monthly payments will increase to a point where they will exceed the monthly OA contributions from your salary. Looking at the example above, we can see that a couple having the median wage will have a net negative OA balance every month. Not only does cash have to be used to top up, but your OA will be quite empty when you are in your 50s.
Also, the estimates in the examples above are quite conservative. What happens if the interest rates go up to 5, 6 or even 7%? This increase will be very painful to the average household.
Here are some scenarios that might happen when HDB bank loans start becoming taxing on households. This is just conjecture and listed for discussion’s sake.
Your Choice, Your Responsibility
As mentioned above, it is a one-way street. You chose to take the risk to enjoy the low-interest rates. Now when the interest rates start to balloon, you will need to just pay up or sell your house.
Government Intervention
But as I said, when homeownership is at risk, it creates instability. The government might be forced to come in to help alleviate the situation. Will they step in to force banks or use taxpayers’ money to subsidize the increase in mortgage payments? Or will there be a temporary provision to allow the conversion of HDB bank loans to HDB loans? This would be extremely unfair to those that choose to go with HDB loans for stability and sacrificed paying higher interest rates.
Banks vs Banks
There is still time before the interest rates possibly go above 2.6%. Banks typically make a 1% margin on housing loans. Will banks lower their margin to keep it below 2.6% for as long as possible? By locking down the customers early, it is preventing other banks from making money from the same customers. The estimated loan rates will be about 2.9% (1.9% + 1% margin) by the end of the year. However, as of writing this article, DBS is offering a 5-year 1.8% fixed rate for refinancing HDB bank loans despite possibly making a loss when interest rates increase.
CPF Increasing Rates (Highly Unlikely)
Just like when we are used to low-interest rates, we are also used to the 2.6% HDB loan. If the interest rates increase significantly for a long period, CPF interest rates MIGHT increase. Then the HDB loan interest rates will increase accordingly. It is highly unlikely as it will be difficult for CPF to bring it back down after increasing the CPF interest rates.
Are Increased Monthly Payments Least Of Your Problems?
If we are buying our property to stay in, it might be a hassle when interest increase. But if it is bought for investment purposes, not only monthly payments will increase, but property prices might also fall. High-interest rates make it more costly to purchase a property and less attractive to other investment instruments like bonds, which lowers the demand for purchasing a property. When demand falls, prices fall.
Source: Date from MAS and Data.gov.sg
If we look at the data from 1987 Q3 to 2020 Q1, the private residential price index and the 3-month average SIBOR/SORA have a moderate inverse relationship. The correlation between the two values across the years is -0.73766. Based on this data, interest rate increases might lead to a fall in property prices.
But I have to say, this is good news for households that are looking to buy an HDB flat since the rates are fixed at 2.6% (for now). Also, the banks and other savings instruments like Singlife and Dash Pet could increase their rates accordingly.
Existing Versus Future House Buyers
Existing loaners are the ones that will be impacted the most as interest payments will increase while their property prices decrease. As the loan is taken when property prices are still higher, you are stuck paying for a loan amount that can be higher than the current property prices.
Future loaners might be paying higher interest rates but the loan quantum will be lower due to the lower property prices.
TL, DR
HDB bank loans are getting expensive when interest rates increase. We have enjoyed low-interest rates for over a decade, but to control inflation, interest rates are increasing. The increase in interest rates will lead to a significant increase in interest and monthly payments. Homeownership is a cornerstone of a nation’s stability so when it becomes unaffordable, will the government have to step in? Not only will monthly payments increase, but property prices will also likely fall, creating a double whammy.
CPF-OA interest rate depends on banks’ FDs & savings interests, but with a floor rate of 2.5%.
For over 21 years, our banks have been giving very low interests, hence the 2.5% has been stuck practically forever i.e. Sinkies below 55 yrs old don’t really have any experience of CPF-OA rates above 2.5%.
But if Fed raises to 5% and stays there for a while to ensure inflation stays subdued, then we will go back to 1990s era.
That was when CPF-OA was paying roughly 3.5%, and by 1999 it was 4.4%.
There’s some real danger that inflation will not go down to 1%-2% like in the last 20 years, and instead be stuck at 4%-5% even in best case scenario because of structural & secular changes in the world e.g. de-globalisation, geopolitical polarisation i.e. no longer easy & cheap access to cheap foods or cheap raw materials or cheap production in cheaper countries.
If that’s the case, then Fed will stick to around 5% for the long term, which was the norm pre-2000.
Hi Sinkie,
with banks coming up with all the bonus criteria (e.g. salary crediting, investments, insurance), they have managed to keep their base interest rates low. According to Josephine Teo, the OA rates will not take into account these “bonus rates”. We can only wait and see if the OA actually rises. It will only affect my bank accounts if the bank interest rates increase as my OA balance is 0.
It is also interesting to look out for SA, which is tagged to the 12 month average of the 10 year Singapore government bond + 1%. The 10 year rate in May 2022 is 2.71%. If it continues to increase in the long term, we might see SA increasing above 4%.
I remember learning in secondary school that globalization is the way to go but it looks like we are going back to relying on domestic production due to national security reasons. I believe we can expect the cost of living to rise greatly.
We are all just theory crafting now and only time will tell what will happen. Let’s see what will happen to the economy when all these changes occur.