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With home loan rates expected to soften as overnight bank lending rates ease, homeowners and potential home buyers have reason to cheer.

The current three-month compounded Singapore overnight rate average (Sora) of 2 per cent per annum is down by about 100 basis points, versus around 3 per cent per annum at the start of the year. The three-month compounded Sora was about 3.7 per cent per annum at the start of 2024.

As many home loan packages here are priced against the three-month compounded Sora, the rate’s decline will cheer homeowners and potential home buyers.

To illustrate, the monthly repayment for a 25-year S$1 million home loan with interest rate of 100 basis points plus three-month compounded Sora is S$4,742 (assuming the three-month compounded Sora is 2 per cent per annum). This is over 16 per cent lower than S$5,672 based on three-month compounded Sora of 3.7 per cent per annum.

Softer home loan rates boost the ability of borrowers to fund monthly loan repayments largely or entirely from their CPF accounts.

However, while attractive borrowing rates buoy prospective home buyers, slowing domestic economic growth amid weaker global growth due to the US hiking trade tariffs and geopolitical tensions could pose a major headwind for home buyers.

What should potential home buyers do with lower interest rates but softer economic growth prospects?

Borrowing considerations

One, while one must carefully do one’s sums before taking on a large multi-year home loan, one can more confidently borrow when continued softness in interest rates is expected.

Thinking of taking on a two-year or three-year fixed rate home loan charging below 2.5 per cent per annum because the fixed rate offered is better than the best prevailing floating rate available, go ahead. Should interest rates remain generally low, the said loan can be refinanced at reasonable rates after two or three years or possibly even sooner depending on the lock-in period.

In short, assuming minimal risk of interest rates rising sharply, a borrower can confidently max out the size of his home loan as he need not factor in loan servicing ability under much higher interest rate scenarios.

However, a medium-term interest rate is used to calculate a borrower’s total debt servicing ratio, which governs property loans that financial institutions may extend to borrowers.

For homes, this is the higher of a 4 per cent floor or the highest interest rate offered by a financial institution at any time during a property loan’s tenure.

Two, while a homeowner can happily embrace debt in a favourable interest rate environment, he should make ad-hoc repayments to reduce the outstanding home loan balance.

Amid mounting economic uncertainty, it’s wise to channel money from a bonus or an unexpected windfall to prepay a home loan.

Should economic weakness lead to a job loss, one can better manage the shock when one has less debt servicing requirements. Indeed, having greater financial flexibility will reduce the stress of a job loss and allow one to take more time if needed to reposition for the next career move.

Use of CPF savings

Three, use CPF funds to buy a home judiciously as the interest earned from CPF accounts is relatively attractive in a softer interest rate environment.

CPF Ordinary Account (OA) savings can be accessed to buy public or private housing. OA savings can be used for the downpayment and loan taken for the property purchase as well as stamp duty and legal fees.

However, using CPF OA savings entails an opportunity cost. Such savings earn an annual interest rate of 2.5 per cent. Also, the government pays extra interest on the first S$60,000 of a person’s combined CPF balances, which is capped at S$20,000 for OA.

Earning an annual interest rate of 2.5 per cent is appealing compared with the cut-off yield of 1.85 per cent per annum of the latest six-month Singapore government treasury bill (T-bill). 

Moreover, one’s CPF OA savings can grow into a meaningful sum over time via the power of compounding. One could then receive a higher monthly payout for life under CPF Life from the age of 65 and also have funds for use to help finance retirement needs. 

Growing retirement savings matters as life expectancy rises. In 2024, life expectancy for Singapore residents at age 65 years was 19.5 years for males and 22.7 years for females.  

Four, one should go slow with buying a home for letting out and earning potential capital gains even if one need not pay punitive Additional Buyer’s Stamp Duty.

Today, the net yield on purchasing a home is skinny – possibly less than what is earned from CPA OA savings and below the interest rate on a home loan.

While private housing rents rose strongly post Covid-pandemic, rental growth has slowed and the outlook for home rentals is uncertain.

A weaker economy might mean slower hiring of foreigners with good pay packages. Hence, private housing landlords may face rising vacancy levels and lower rental rates. Meanwhile, a condo owner still needs to pay property tax and management fees on a vacant unit.

Moreover, when passenger service on the Johor Bahru-Singapore Rapid Transit System Link starts possibly in late 2026, many Malaysians and others working here who lease Singapore homes may move to cheaper accommodation in Johor Bahru. 

In addition, the government recently raised the holding period from three years to four years as well as the rates of the Seller’s Stamp Duty for residential properties. This means new investors in homes have less flexibility on exiting their investments. 

Despite the availability of high quality public housing here, many Singaporeans aspire to own private homes. Buying a condo is seen to offer access to an enviable lifestyle and help build wealth.

Should potential buyers make a beeline for the upcoming slew of new condo launches? Perhaps not.

Lower mortgage rates will encourage prospective buyers to stretch further financially to help realise their condo dreams. And resisting that sleekly marketed and well conceived new condo home in a good location being pushed by a motivated property agent will be tough.

Ultimately, buying a condo represents a major financial commitment. With the economic uncertainties, they may not be strong drivers to propel private home prices substantially higher. Potential buyers will be wise to have more buffers and proceed with heightened caution.