In Singapore, banks typically offer mortgage loans with fixed interest rates in the first two to three years and variable interest rates thereafter, or other combinations of fixed and variable rates (eg. having a part of your loan under fixed rate and another part under variable rate).

A fixed-rate loan charges the same rate of interest throughout the duration of the loan. You know exactly how much you’d have to pay monthly. But your payments won’t be reduced when interest rates fall. However, payments won’t be increased either if interest rates rise.

In contrast, a variable-rate loan is typically pegged at a fixed “spread” (a certain percentage points) above the bank’s prime rate. The prime rate is the interest rate charged by the bank to its best and most credit-worthy customers. If interest rates go up, so do your monthly mortgage payments. If interest rates drop, you save money with lower payments.

For example, using a 25-year monthly-rest loan of $300,000 (monthly-rest means that the principal amount is reduced every month as you pay the instalment), this table shows how the instalment amount changes as the interest rate changes.

Interest Rate (%)	Monthly Instalment ($)
2.0	1,272
2.5	1,346
3.0	1,423
3.5	1,502
4.0	1,584

Try it yourself! Use this simple calculator to work out your monthly instalment

HDB’s concessionary interest rate is pegged at 0.1% point above the CPF Ordinary Account interest rate. It is revised quarterly, when the CPF interest rate is revised.

Depending on the borrower’s age, housing loans can stretch up to 30 years or more. A longer repayment period means you’ll be paying lower instalments every month but the total interest payment will be higher.

As the saying goes, there’s no free lunch. If you think “Hey, I’ll be able to afford my dream home, just by taking a little longer to repay”, then think again!

For example, assume that you are taking up a $400,000 housing loan, and the interest rate is a fixed 4% pa.

Repayment Period (Years)	Monthly Instalment ($)	Total Repayment (Principal + Interest) ($)	Total Interest ($)	% of Interest in Total Repayment
15	2,959	532,575	132,575	25%
20	2,424	581,741	181,741	31%
25	2,111	633,404	233,404	37%
30	1,910	687,478	287,478	42%

For the 20-year loan, the total interest charge is $181,741. In contrast, for the 30-year loan, you’ll pay interest of $287,478 – that’s $105,737 extra, and with interest forming 42% of the total repayment!

Try it yourself! Use this calculator to work out the total interest on a housing loan

If you’re using CPF to repay your housing loan, it would be ideal to pay off the mortgage by the time you reach 55. This is because of the lower CPF contribution rates for workers above 55. You should also note that the contribution rates for workers above 50 to 55 are lower than for those below 50.

The cost of a loan largely depends on the loan repayment period, interest rate and how the interest is computed. Here are two ways of computing interest that you should know about:

Monthly-Rest (also known as monthly-reducing)
When you pay an instalment, the amount comprises:

• a payment for the interest charge, and
• a payment towards the principal (the loan amount).

Monthly-rest means that the principal amount you pay every month is deducted when calculating the interest rate for the following months. Interest is thus computed on the principal outstanding at the start of each month.

Annual-Rest (also known as annual-reducing)
Annual-rest means that the total principal repaid by the end of the year is deducted when calculating the interest rate for the next year. Interest is thus computed on the principal outstanding at the start of each year.

In general, the interest charge will be the lower for monthly-rest, and higher for annual-rest. A useful rule of thumb: The more frequently the interest is computed, the better.