You will build a sheet that shows what a rise or fall in rates would do to your monthly payments and interest income.
Most people find out how a rate rise affects them when the bank's letter arrives with the new instalment. By then the only choices left are to pay it or to scramble. A stress test turns that around. You work out now, on a quiet evening, what your loans and savings would look like at higher and lower rates, and you see how much room your budget has before anything happens.
This exercise builds that sheet in a spreadsheet, step by step. Marcus and Grace's figures from lesson 2.4, The borrower and the saver in you feel a rate move differently, are used as the worked example. They are made-up figures; yours replace them as you go.
Open a new sheet and give each loan its own row. For each, record four things: the outstanding balance, the remaining term in months, the rate type, and the current rate.
The rate type matters most. A floating rate loan, priced off SORA as in lesson 2.2, What SORA is and how it ends up in your mortgage, moves at each reset. A fixed rate loan does not move until its fixed period ends, so note that date. Car loans and many personal loans in Singapore are quoted at a flat rate that stays the same for the whole term. They are expensive, as lesson 3.2 of How money works, Why a flat rate loan costs nearly double what it looks like, showed, but a rate rise will not change their instalment.
Marcus and Grace's sheet has two rows. The home loan: S$500,000 outstanding, 300 months left, floating, 3.0%. A car loan: flat rate, fixed for its term, so they mark it "not rate-sensitive" and carry its instalment across unchanged.
For each rate-sensitive loan, add three columns: the instalment at the current rate, at one percentage point higher, and at two points higher.
The PMT function does the work. In Excel or Google Sheets it takes the rate per period, the number of periods and the amount borrowed:
=PMT(rate/12, months, -balance)
The minus sign in front of the balance makes the answer come out as a positive payment. For the home loan at the current rate, the formula is =PMT(3%/12, 300, -500000), which gives S$2,371.06. Changing the rate to 4% gives S$2,639.18, and 5% gives S$2,922.95.
Add a column for the increase over the current instalment. For Marcus and Grace, that is S$268.13 at one point higher and S$551.89 at two points higher.
If your fixed rate period ends within the next year or two, test that loan too, using a rate you might face when it reverts. Check what your letter of offer says happens at the end of the fixed period.
Below the loans, list your interest-earning savings: deposits, fixed deposits and T-bills, each with its balance and current rate. Leave out CPF and investments, as in lesson 2.4.
Work out the monthly interest at the current rate, at one point higher and at one point lower. The formula is simply balance x rate / 12.
Marcus and Grace hold S$30,000 at an example rate of 2.5%. That earns S$62.50 a month. At 3.5% it would earn S$87.50, and at 1.5% it would earn S$37.50. Remember from lesson 2.3, Deposits, fixed deposits and T-bills move with rates, at different speeds, that the savings side changes later than the loan side, often only when deposits mature.
Now the number that matters. Your monthly surplus is what is left after all your regular spending and saving each month. Your cash flow statement from lesson 1.4 of The Singapore personal finance system, Build your cash flow statement, gives you this figure.
Put the surplus at the top of a final column and subtract each increase in loan payments from it.
Marcus and Grace have a surplus of S$1,200 a month in this example. At one point higher, the loan costs S$268.13 more, leaving S$931.87. At two points higher, it costs S$551.89 more, leaving S$648.11. The extra savings income would add a little back, but only later and only S$25 a month per point.
So their budget absorbs a two-point rise with room to spare. Working backwards with the same PMT formula, the instalment would only eat the whole S$1,200 surplus at a loan rate of about 7.1%. They decided they did not want to spend more than half the surplus on a rate rise, which puts their comfortable limit at a loan rate of about 5.2%, a rise of just over two points.
A finished stress test fits on one screen. It has one row per loan with balance, term, rate type and current rate, three instalment columns and the increases. Below that sits one row per savings pot with income at three rates, and a final block showing your surplus after each rate scenario.
Underneath, write one sentence. Marcus and Grace wrote: "We can absorb a rate rise of about two points before rate costs take more than half our monthly surplus." That sentence is the reason to build the sheet. When the next rate headline arrives, they already know whether it matters to them.
Your own sentence may be more reassuring than theirs or less. Gather your latest loan statements and your savings balances, and build your sheet with your own numbers.
Build the rate stress-test sheet for your own loans and savings and write one sentence on the rate rise your budget could absorb.
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