Work out the net effect of a rate change on you as a borrower and as a saver.
Grace and Marcus (an invented example couple) both see a headline saying interest rates are rising. Grace takes it as good news because her fixed deposits will pay more. Marcus takes it as bad news because their home loan instalment will go up. They are talking about the same household, and each of them is right about one part of it.
If you have a loan and some savings, you're in the same position as most adults: a borrower and saver at the same time. A rate move pushes your borrowing costs and your savings income in opposite directions, so one change affects you both ways at once. What matters is which side is bigger for you. For most people with a home loan, the answer is less comfortable than it first looks.
On the borrowing side, a rise reaches floating rate debt at the next reset, when your payment goes up. Lesson 2.2, "What SORA is and how it ends up in your mortgage", shows how the new rate gets into your instalment.
On the saving side, a rise means new fixed deposits and new T-bills pay more, and savings account bonuses follow over time. Each product reacts at a different speed. Lesson 2.3, "Deposits, fixed deposits and T-bills move with rates, at different speeds", sets out how fast each one adjusts. Your extra interest only starts once your deposits roll over into the new rates, so it reaches you after the higher loan instalment has already begun.
When rates fall, both effects reverse. Your loan becomes cheaper and your savings income drops.
The couple owe S$500,000 on their flat (an invented figure), with 25 years left to run, on a floating rate of 3.0%. They have S$30,000 (also invented) in fixed deposits and savings.
At 3.0% their monthly instalment is S$2,371.06, about S$2,371. If the rate goes up one percentage point to 4.0%, the instalment becomes S$2,639.18, which is S$268.13 more each month. Over a year that comes to about S$3,218.
Their savings gain is much smaller. One percentage point on S$30,000 is S$300 a year, or S$25 a month, and they only get it after their deposits roll over. Side by side, the rise costs them about S$268 a month on the loan and brings in about S$25 a month on savings. Grace is correct that the deposits will earn more and Marcus is correct that the loan will cost more, and taken together the household is worse off. For the two sides to balance, their savings would have to be more than ten times what they hold now.
In a mortgage household the debt is usually many times larger than the savings earning interest, and that gap decides the result. Most mortgage holders are in a similar position to Grace and Marcus, so a rate rise usually hurts them more than it helps. A household with no loan and plenty of cash, as many retirees are, mostly gains from higher rates. Your own figures decide which kind of household you are.
In the first years of a long loan, most of each payment is interest. For Grace and Marcus at 3.0%, first-month interest is S$500,000 x 3.0% / 12 = S$1,250, and the remaining S$1,121 or so of the S$2,371 instalment repays the loan. At 4.0%, first-month interest is about S$1,667, so the interest portion goes up by a third. The instalment has to rise to cover this, or the loan won't finish on schedule. Because so much of an early payment is interest, a single percentage point can add over S$250 to a monthly instalment.
The effect grows with the balance and with the years left. Someone near the end of a small loan will barely notice a rate change. A couple who bought recently and are at the start of a large loan feel it most.
Rates matter before you borrow anything. When you apply for a new property loan, the bank checks more than whether you could pay it at today's rate. MAS requires banks to calculate debt servicing using a medium-term interest rate floor, a rate MAS sets and can change. This is part of the bank's stress test, its check that you could still afford the loan if rates were higher than they are now. It protects you from taking on a loan you could only just manage at current rates.
HDB loans follow HDB's own rules. No floor figure is given here, so check the current numbers on the MAS and HDB websites.
If rates climb, or MAS raises the floor, the biggest loan a bank will offer you can shrink. If you plan to buy or refinance, a rate move can change how much you can borrow as well as how much you pay each month.
Start with the debt whose rate can change. Count floating rate loans, along with fixed rate loans whose fixed period ends soon. The balances are on your latest loan statement.
Then add up the money earning interest at a rate that can change: savings, deposits and T-bills. Your bank and T-bill records have these amounts. Leave CPF out, because CPF interest rates are set under CPF rules, and leave out investments whose returns depend on markets.
Put the two totals next to each other and see which is bigger. For a rough idea of what a one percentage point rise would do, estimate each side:
For the loan, work out how much your monthly instalment would change. For savings, take 1% of your interest-earning savings as the yearly gain, and remember it only arrives once your deposits roll over.
The next lesson builds the full stress test, and you need these two headline numbers first. For Marcus and Grace it was S$500,000 against S$30,000, and the answer was obvious. Your figures may be closer, or they may surprise you in the other direction. Find them from your latest loan statement and your bank and T-bill records, and see which side of a rate move you mostly sit on.
Write down how much floating rate debt you have in total and how much you hold in savings that earn interest. Note which is bigger.
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