Build a sheet showing what a rise or fall in rates would do to your monthly payments and interest income.
A rate stress test works out three things before rates move: what your loan instalments would become if rates rose, what your savings interest would do, and how much of your monthly budget the difference would take. You build it once, in a spreadsheet, with your own loans, savings and monthly surplus.
Most people find out how a rate rise hits them when the bank's letter arrives with the new instalment. By then the only choices left are to pay it or scramble. Doing the sums earlier lets you look at your loans and savings at both higher and lower rates, and at the headroom in your budget, while nothing has changed yet. Marcus and Grace, the couple you met in lesson 2.4, "The borrower and the saver in you feel a rate move differently", are the worked case throughout (all their figures are invented).
Start a fresh sheet with one row per loan. Each row needs the amount still owed, the months left to run, the type of rate and the rate you pay today. Of those four, the rate type deserves the most care, because it tells you whether a rise in rates touches that loan at all.
Many floating rate loans are priced off compounded SORA, the average of the daily SORA rate over one, three or six months, and change at every reset. Lesson 2.2, "What SORA is and how it ends up in your mortgage", walks through how that pricing works. Banks also offer floating rate loans priced off their own board rates or fixed deposit rates, so check your letter of offer to see which one your loan uses. Fixed rate loans stay where they are until the fixed period runs out, so add a note of the date it ends.
Car loans in Singapore, and many personal loans, are quoted at a flat rate that holds for the full term. How money works lesson 3.2, "Why a flat rate loan costs nearly double what it looks like", showed how expensive these loans are. A rise in rates still leaves their instalment where it is. Label each one not rate-sensitive and copy its instalment across the columns as it stands.
Marcus and Grace have two rows. Their home loan is floating, with S$500,000 still owed over 300 months at 3.0%. Their car loan is on a flat rate, so it gets the "not rate-sensitive" label.
Each rate-sensitive loan gets three instalment columns: today's rate, 1 percentage point above it and 2 percentage points above it. The PMT function does the arithmetic and behaves the same in Excel and Google Sheets. You give it the rate per period, the number of periods and the amount borrowed, in this form:
=PMT(rate/12, months, -balance)
Putting a minus sign in front of the balance turns the answer into a positive payment. After the three instalment columns, add a fourth showing how much more each higher instalment is than the current one.
Marcus and Grace type =PMT(3%/12, 300, -500000) and get S$2,371.06. Changing the rate to 4% gives S$2,639.18, and 5% gives S$2,922.95. Compared with today's instalment, they would pay S$268.13 more a month at one point higher and S$551.89 more at two points higher.
A fixed rate loan belongs in the test too if its fixed period finishes in the next year or two. Run it at a rate you could realistically be charged once it reverts. Your letter of offer sets out what the loan switches to when the fixed period is over.
Under the loans, add your savings, limited to the ones that earn interest: deposits, fixed deposits and T-bills. Give each its balance and the rate it earns now. CPF and investments stay off the sheet, the same as in lesson 2.4. For savings the three columns are today's rate, one point up and one point down, and the monthly interest on each item is balance x rate / 12.
Marcus and Grace hold S$30,000 earning 2.5% (an example rate), which brings in S$62.50 a month. At 3.5% it would bring in S$87.50 a month, and at 1.5% it would bring in S$37.50, a change of S$25 a month for each percentage point.
Savings rates tend to lag behind loan rates and often shift only as deposits mature. Lesson 2.3, "Deposits, fixed deposits and T-bills move with rates, at different speeds", goes through the reasons. After a rise, the higher savings income does offset a little of the extra instalment, but it arrives later.
Your monthly surplus is the amount left each month once your regular spending and saving are covered. You already have this figure from the cash flow statement you made in The Singapore personal finance system lesson 1.4, "Build your cash flow statement". Enter it at the head of a last column, then take each instalment increase away from it.
For Marcus and Grace the surplus is S$1,200. At one point higher, S$1,200 - S$268.13 leaves S$931.87. At two points higher, S$1,200 - S$551.89 leaves S$648.11. A two-point rise would fit in their budget with some room left over.
You can also run the sheet in reverse to find the highest loan rate your budget can carry. Keep raising the rate inside the PMT formula until the increase matches your entire surplus, or the portion of it you'd be prepared to give up. Marcus and Grace's full S$1,200 would be gone at a loan rate of about 7.1%. They set themselves a ceiling of half their surplus, S$600, for any rate rise, which puts their comfortable limit at a loan rate of about 5.2%, just over two points above where they are now.
When you've finished, everything should be visible on one screen:
a row for each loan showing balance, term, rate type, current rate, the three instalment columns and the increases a row for each savings pot showing its income at the three rates a closing block at the bottom with your surplus under each rate scenario
Under the sheet, write a single sentence on how large a rate rise you could absorb. Marcus and Grace's reads: "We can absorb a rate rise of about two points before rate costs take more than half our monthly surplus." The sheet is built to give you that sentence, so the next time rates are in the news you already know whether the change affects you.
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. Then write one sentence on how big a rate rise your budget could take.
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