Understanding how your mortgage loan interest is calculated by the bank is crucial for making informed financial decisions and managing your housing loan effectively. In Singapore, the interest calculation method can significantly impact your monthly repayments and the total cost of your loan over time.
Before we dive into the specifics, let's differentiate between two common interest calculation methods: amortisation and simple interest. Amortisation gradually reduces your loan principal over time through regular instalments, while simple interest calculates interest only on the original principal amount.
In Singapore, mortgage loan calculations primarily adopt the amortisation model. This means that your monthly repayments consist of both principal and interest portions, and the proportion of each changes over the loan tenure.
Knowing how amortisation calculations work can be particularly helpful when considering options like making a larger down payment or utilising your CPF savings to reduce your overall interest costs.
Let's delve into the mechanics of amortisation and explore how it impacts your mortgage payments
How do Banks Calculate Your Home Loan Interest?
To illustrate how mortgage loan interest is calculated in Singapore, let's look at a typical breakdown provided by financial or bank advisors. This breakdown is often presented in a table format, known as an amortisation schedule, outlining the principal, interest, and outstanding home loan balance over time.
Mortgage Interest Calculation
For the following example on how housing loan interest is calculated and amortisation repayments are made, let's assume the following:
- Loan amount: S$300,000
- Annual interest rate: 3%
- Loan tenure: 30 years (360 months)
- Monthly payment: S$1,265 (This is a simplified example, and the actual monthly payment may vary slightly based on the specific loan terms)
| Month | Monthly Payment | Principal Payment | Interest Payment | Interest/Instalment % | Outstanding Loan Balance |
| 1 | S$1,265 | S$515 | S$750 | 59.3% | S$299,485 |
| 2 | S$1,265 | S$516 | S$749 | 59.2% | S$298,969 |
| 3 | S$1,265 | S$517 | S$748 | 59.1% | S$298,452 |
| ... | ... | ... | ... | … | ... |
| 360 | S$1,265 | S$1,263 | S$2 | 0.1% | S$0 |
Understanding the Amortisation Table
The amortisation table shows how your monthly payments are split between principal and interest over the 30-year loan. As you can see from the "Interest/Instalment %" column:
- Early Years: A larger portion of your payment goes towards interest.
- Later Years: The interest portion decreases significantly, and more of your payment goes towards paying down the principal.
How Are These Numbers Generated?
The calculations in this table are based on the amortisation formula, which considers the loan amount, interest rate, and loan tenure. Here's a simplified explanation of the steps involved:
- Step 1: Calculate the Monthly Interest Rate: Divide the annual interest rate by 12 to get the monthly interest rate. In this case, the monthly interest rate is 0.25% (3% / 12).
- Step 2: Calculate the Monthly Interest Payment: Multiply the outstanding loan balance by the monthly interest rate. In the first month, the interest payment is S$750 (S$300,000 x 0.25%).
- Step 3: Calculate the Principal Payment: Subtract the monthly interest payment from the total monthly payment. In the first month, the principal payment is S$515 (S$1,265 - S$750).
- Step 4: Calculate the New Outstanding Loan Balance: Subtract the principal payment from the previous month's outstanding loan balance. In the first month, the new outstanding loan balance is S$299,485 (S$300,000 - S$515).
Assumptions Made
This table assumes a fixed interest rate and fixed monthly payments throughout the loan term. In reality, interest rates can fluctuate, and you might have options to make extra payments or refinance your loan, which can alter the amortisation schedule.
If you have difficulty understanding how the amortisation loan calculation works, it is best to clarify your doubts with a mortgage advisor in Singapore.
Factors That Affect How Much Interest You Pay
We’ve seen how amortisation works to ensure your interest and principal is repaid fully within the loan tenure. But how do you calculate the interest rate on a home loan and what are the factors involved?
Several key elements influence the amount of interest you'll pay on your mortgage loan. Understanding these factors can help you make informed decisions and potentially save money over the loan tenure.
Loan Amount & Property Price
The loan amount and property price directly impact the total interest paid. A higher loan amount generally results in higher interest charges. Your down payment amount also plays a role, as a larger down payment reduces the loan amount and, consequently, the total interest paid.
The Loan-to-Value (LTV) ratio, which is the loan amount divided by the property value, is another crucial factor. A higher LTV often leads to higher interest rates. Recent announcements regarding the reduction of LTV limits in Singapore can significantly affect the total interest payable, as borrowers may need to make larger down payments, reducing their loan amount and potentially lowering their overall interest costs.
Credit Score
Your credit score reflects your creditworthiness and ability to manage debt. A higher credit score generally qualifies you for lower interest rates, as lenders perceive you as a lower-risk borrower. Maintaining a good credit score is essential for securing favourable loan terms and minimising interest payments.
Total Debt Servicing Ratio (TDSR)
The TDSR is a regulatory measure in Singapore that limits the amount you can spend on monthly debt repayments to a maximum of 55% of your gross monthly income. A lower TDSR indicates a healthier financial situation and can positively impact your loan eligibility and interest rates.
Loan Type
The type of home loan you choose significantly determines how your housing loan interest is calculated. Fixed-rate loans offer stability with a constant interest rate throughout the loan tenure, while floating-rate loans have variable interest rates that fluctuate based on market conditions. Floating rates can be lower initially but may increase over time, potentially leading to higher overall interest costs.
Loan Tenure
The loan tenure, or the duration of your loan, also influences the total interest paid. Longer loan tenures result in lower monthly payments but higher overall interest costs, as you're paying interest over a more extended period. Shorter loan tenures have higher monthly payments but lower total interest paid.
Refinancing
Refinancing your mortgage involves switching to a new loan package, potentially with a lower interest rate or different terms. Refinancing can be a strategic move to reduce your interest payments and save money over the remaining loan tenure. However, it's essential to consider any associated fees and charges before deciding to refinance.
Other Macroeconomic Factors
Various macroeconomic factors can influence how banks calculate interest on home loans in Singapore, including:
- Monetary Authority of Singapore (MAS) Policies: The MAS manages monetary policy to maintain price stability and promote sustainable economic growth. Their policies can impact interest rates offered by banks.
- SORA (Singapore Overnight Rate Average): SORA is a benchmark interest rate that reflects the average rate banks lend to each other overnight. It can influence floating interest rates on home loans.
- Economic Growth and Employment Rates: A strong economy and healthy employment rates can lead to lower interest rates, while economic downturns may result in higher rates.
- Liquidity and Banking Competition: Increased liquidity in the banking sector and competition among banks can drive interest rates down.
- Global Economic Conditions: Global economic events and trends can also impact local interest rates, as Singapore is a global financial hub.
Avoid The Hassle with A Mortgage Calculator
Navigating the world of mortgages can feel overwhelming, especially when it comes to understanding complex interest calculations and amortisation schedules.
As experienced mortgage brokers, we know that potential homeowners often face challenges in grasping these financial intricacies. That's why we've created a user-friendly mortgage loan calculator in Singapore designed to simplify the process and empower you to take control of your home financing journey.
