The Mortgage Myth Most Buyers Fall For
At first glance, a Singapore home loan looks refreshingly simple. The bank flashes a neat headline rate — “3.50% p.a. SORA package” — and most buyers breathe a sigh of relief. That number feels concrete, manageable, even reassuring. The problem? It’s only a sliver of the story.
This fixation on the headline rate is the biggest mortgage myth buyers fall for. It creates the illusion that choosing the lowest advertised percentage automatically means choosing the cheapest loan. In reality, that rate tells you almost nothing about how much you’ll truly pay over 25 or 30 years.
That’s why many homeowners only feel the pain years later. Monthly instalments creep up. Interest paid far exceeds expectations. Refinancing suddenly comes with penalties and fees they didn’t factor in. What looked affordable on day one quietly becomes expensive — not because of bad luck, but because the real cost was never visible upfront.
The truth is simple but uncomfortable: your home loan doesn’t get expensive because banks “raise rates”. It gets expensive because of how interest is calculated, how often it resets, what fees are embedded into the package, and what it costs to exit or switch when conditions change. Until you look beyond the headline rate, you’re not seeing the price of your loan — you’re only seeing the marketing.
Nominal Interest Rate vs Real Cost: Why EIR Matters More
When banks advertise home loans in Singapore, they sell you a nominal interest rate — the clean, headline number splashed across brochures and comparison tables. This is the rate borrowers latch onto, compare, and use to justify affordability. But it’s not the number that determines how much your loan actually costs.
What you truly pay is reflected in the Effective Interest Rate (EIR). EIR measures the real annual cost of borrowing by factoring in how interest is accrued over time, how your loan balance reduces, the effect of compounding, and the impact of fees tied to the package. In other words, it captures the economic reality of the loan — not just its marketing label.
Because of this, EIR is always higher than the quoted nominal rate. Daily interest accrual, monthly “rest”, and compounded benchmarks push the true cost upward. Add in administrative charges, legal fee subsidies that may be clawed back, valuation costs, or mandatory insurance, and the gap widens further. None of these distortions are visible when you look only at the advertised rate, yet all of them affect how much interest you ultimately pay.
Over a long tenure, these mechanics matter far more than a seemingly small difference in headline percentages. A loan that looks marginally cheaper on paper can end up costing tens of thousands more once compounding and fees are accounted for — a difference that only shows up when you compare EIR, not nominal rates.
So why do most buyers still fixate on the wrong number? Because nominal rates are easy to understand, heavily promoted, and emotionally reassuring. EIR, by contrast, feels technical and abstract — even though it’s the figure that tells you what the loan really costs. Until borrowers shift their focus from advertised rates to effective ones, they remain vulnerable to loans that look cheap upfront but quietly become expensive over time.
How Your Home Loan Interest Is Actually Calculated
Most borrowers assume their mortgage interest works like a simple annual percentage applied neatly to their loan. In practice, Singapore home loans are far more granular — and that’s where cost quietly builds up.
For most bank mortgages, interest is accrued daily but charged monthly. Each day, the bank calculates interest based on your outstanding loan balance. At the end of the month, all those daily interest amounts are added together and billed to you. This isn’t just a technical detail. Daily accrual means interest responds immediately to your balance and prevailing rates, rather than being smoothed out over the year.
This leads to what banks call a monthly “rest”. Once interest is charged at month-end, it effectively becomes part of the base for future calculations until your next repayment reduces the principal. Over time, this compounding effect accelerates the total interest paid, especially in the early years of the loan when your outstanding balance is highest. Even small differences in calculation method can translate into large cost differences over a 25- or 30-year tenure.
Adding another layer of complexity is the industry’s shift away from older fixed benchmarks to compounded SORA. Instead of a simple reference rate, many floating packages now peg your loan to 1-month or 3-month compounded SORA. This rate is built by compounding daily SORA figures over a look-back period, then applying the result as your base rate for the next reset cycle.
On top of this base sits the bank’s margin — a fixed spread added to the compounded SORA. When banks advertise a rate like “3-month SORA + 1.20%”, the final interest you pay is the sum of a market-driven, compounded benchmark and a permanent markup. As SORA moves, your all-in rate moves with it, while the margin remains locked in.
The result is a calculation method that increases long-term cost almost invisibly. Daily accrual, monthly rest, compounding benchmarks and periodic resets all interact to push the effective cost above what borrowers intuitively expect. The headline rate may look stable, but under the hood, the mechanics ensure your loan is constantly recalculating — and quietly getting more expensive than most buyers realise.
Compounded SORA Explained (Without the Jargon)
Compounded SORA sounds intimidating, but the idea behind it is simpler than the terminology suggests. What confuses most borrowers isn’t SORA itself — it’s how the “1-month” and “3-month” labels actually work in real life.
When a loan is pegged to 1-month or 3-month compounded SORA, it doesn’t mean the bank picks a single SORA number and sticks with it for that period. Instead, SORA is published daily. For each reset, the bank looks back over the previous one or three months and compounds the daily SORA rates across that entire window. The result is one averaged, compounded figure that becomes your base rate for the next cycle.
This “look-back” approach matters because compounding doesn’t behave like a simple average. When daily rates rise or stay elevated for longer, their effect stacks on top of each other. That means compounded SORA tends to sit higher than what borrowers intuitively expect, especially in sustained high-rate environments. It’s mathematically precise — but not borrower-friendly.
This is also why compounded benchmarks behave very differently from flat or fixed rates. A flat rate stays constant regardless of what happens day to day in the market. Compounded SORA, by contrast, absorbs volatility. Short-term spikes, persistent upward trends, and delayed rate cuts all get baked into the final figure you’re charged.
And this feeds directly into your monthly instalment. Once the compounded SORA for the period is determined, the bank adds its margin and applies the all-in rate to your outstanding loan balance. If the compounded rate comes in higher than the previous cycle, your repayment increases — even if headline mortgage rates haven’t visibly changed. To the borrower, it can feel sudden and unexplained. In reality, it’s the quiet outcome of daily compounding happening in the background, long before your bill arrives.
Why Floating-Rate Loans Rise Faster Than You Expect
Floating-rate home loans don’t just move — they reset, and that reset frequency plays a bigger role than most borrowers realise. Packages pegged to 1-month compounded SORA reprice every month, while 3-month SORA packages typically reset quarterly. Each reset uses the latest compounded SORA plus your fixed bank margin. The more frequent the reset, the faster changes in market rates show up in your instalment.
This is why even small movements in SORA can feel disproportionately painful. A fraction of a percentage point doesn’t sound dramatic, but when it’s applied to a large outstanding loan balance and recalculated repeatedly, the impact compounds. Over successive resets, modest increases stack on top of each other, turning what looks like a minor rate change into a noticeable jump in monthly repayments.
Expectations are further distorted by promotional periods. Many floating packages start with an attractive first-year or two-year rate that sits well below longer-term averages. During this phase, instalments feel comfortable, reinforcing the belief that the loan is affordable. What buyers often miss is that these early rates are not representative — they’re designed to sell the package, not to reflect its long-term cost.
This leads to the psychological trap of “it was cheaper in year one.” When instalments rise after the promo ends or when SORA stays elevated, borrowers feel blindsided, even though the loan is behaving exactly as structured. The increase feels unfair because the original reference point was artificially low. By anchoring expectations to an introductory rate instead of a long-term average, many homeowners underestimate how quickly floating-rate loans can become more expensive — and how little control they have once the resets kick in.
Lock-In Periods: The Cost of Trying to Escape
Lock-in periods are where many home loans reveal their sharpest edges. In Singapore, most bank mortgage packages come with a 2–3 year lock-in, during which your ability to refinance or fully redeem the loan is restricted. On paper, this looks reasonable — a fair trade for a lower rate upfront. In reality, it can become an expensive trap when market conditions change.
If you exit the loan during the lock-in, you’ll usually face an early redemption penalty, commonly a percentage of the outstanding loan amount. This penalty is designed to deter borrowers from leaving early and can translate into a five-figure cost on a large mortgage. It’s not interest, but it feels just as painful because it’s paid in cash, upfront, at the exact moment you’re already under pressure from rising rates.
Then there are legal fee subsidies — often marketed as “free legal” or “fully subsidised conveyancing”. These aren’t truly free. They typically come with a clawback clause, meaning if you refinance or redeem the loan within a specified period, you must repay the subsidy. Combined with redemption penalties, this can wipe out the savings you hoped to achieve by switching to a cheaper package.
This is where timing mistakes turn rate hikes into real cash losses. When interest rates rise sharply, the logical response is to refinance or reprice. But if you’re still inside a lock-in, escaping becomes costly. Miss the window by a few months, and you either absorb higher instalments or pay penalties that make switching uneconomical. The structure of the loan, not just the rate itself, determines whether you have flexibility — or whether you’re forced to ride out higher rates at your own expense.
Repricing vs Refinancing: Fees That Quietly Add Up
When interest rates move against you, the natural instinct is to “switch to a cheaper loan”. This is where borrowers encounter the choice between repricing and refinancing — two options that sound similar but carry very different cost implications.
Repricing means staying with your existing bank and converting to another package they offer. It’s usually faster and involves less paperwork, but it’s not free. Banks commonly charge admin or conversion fees, often a few hundred dollars and sometimes close to a thousand. While this is cheaper than a full refinance, it still adds to your total loan cost, especially if you reprice multiple times over the life of the mortgage.
Refinancing, on the other hand, involves moving your loan to a new bank. This can unlock better rates, but it comes with a longer checklist: new legal documentation, possible valuation fees, and fresh processing costs. Even when legal subsidies are offered, they may be subject to clawback if you switch again too soon. Refinancing can deliver meaningful savings — but only if the cost of switching doesn’t eat into them.
This is where “free conversion” offers come in. These promotions typically waive the bank’s conversion or admin fee when you reprice internally. What they don’t cover are external costs, such as legal fees from refinancing, valuation charges, or penalties tied to existing lock-in clauses. “Free” often means partially free, and only within a narrow set of conditions.
The danger lies in frequent switching. Each repricing or refinance may seem justified in isolation, but fees accumulate quietly in the background. Over time, repeated admin charges, legal costs, and subsidy clawbacks can erode — or even negate — the interest savings you were trying to capture. Without a long-term view, borrowers end up working hard to chase lower rates, only to discover that the act of switching has become another hidden cost of their home loan.
Fees Outside the Interest Rate That Inflate Your Loan Cost
Even when the interest rate looks competitive, it rarely tells the full story. Home loan costs extend well beyond interest, and it’s these additional charges that quietly inflate what you pay over time.
The most common are legal fees, valuation fees, and insurance premiums. Legal costs arise when you take up, refinance, or sometimes reprice a loan. Valuation fees may apply when a bank needs an updated assessment of your property’s value. Certain packages also require mandatory insurance, such as mortgage-related coverage, which adds another layer of cost that isn’t reflected in the headline rate. Individually, these amounts may look modest. Collectively, they matter.
What many borrowers miss is how these one-off costs affect the Effective Interest Rate (EIR) over long tenures. EIR spreads these upfront and ancillary expenses across the life of the loan, revealing their true impact on annual cost. When you factor legal fees or insurance into a 25- or 30-year mortgage, the effective rate rises — even though the nominal interest rate stays the same. This is why two loans with identical headline rates can have meaningfully different EIRs.
These charges are often underestimated in affordability planning because buyers focus on monthly instalments, not total cost. One-off fees feel temporary and are frequently paid out-of-pocket, which psychologically separates them from the loan itself. But from a financial standpoint, they are part of the cost of borrowing, and ignoring them leads to an overly optimistic view of affordability.
To address this, MAS requires lenders to disclose EIR to improve transparency and comparability. In theory, this should help consumers make better decisions. In practice, many still default to comparing advertised rates, glossing over EIR disclosures buried deeper in loan documents. The result is a gap between regulatory intent and consumer behaviour — and a mortgage that costs more than expected, not because the information wasn’t available, but because it wasn’t given enough weight.
Putting It Together: A Simple Cost Comparison Framework
To truly understand why your home loan costs more than the advertised rate, it helps to look at the full picture rather than fixating on the nominal interest alone. One of the clearest ways to do this is by comparing the nominal rate versus the Effective Interest Rate (EIR) over a 25- or 30-year loan tenure. While the headline rate may seem low, the EIR accounts for daily accrual, monthly rest, compounding, fees, and other loan mechanics — giving you a realistic view of your annual borrowing cost.
Most of the “extra” cost comes from a combination of hidden and compounding effects:
-
Daily interest accrual and monthly rest, which accelerate total interest paid over time
-
Compounded SORA adjustments and floating-rate resets that reflect market movements
-
Lock-in penalties, legal fee clawbacks, and conversion/refinancing costs if you try to escape a rising rate
-
Ancillary fees like valuation, legal, or mandatory insurance costs that subtly raise your EIR
When all of these elements are added together, the loan that looks cheapest based on its nominal rate often turns out to be more expensive over the long term. Focusing solely on advertised rates creates a false sense of savings, while EIR-based comparisons reveal which packages truly offer the lowest total cost. The key takeaway: always look beyond the number on the brochure — the cheapest-looking loan is rarely the cheapest overall.
A Smarter Way to Evaluate Home Loans in Singapore
Navigating the maze of home loan options in Singapore requires more than comparing advertised rates. To make an informed decision, start by always comparing the Effective Interest Rate (EIR) rather than the headline rate. EIR captures the true annual cost of borrowing, factoring in interest calculation methods, fees, and compounding — giving you a realistic measure of affordability over the life of your loan.
Next, pay close attention to the SORA type, reset frequency, and volatility exposure. Decide whether a 1-month or 3-month compounded SORA package suits your risk tolerance, and understand how frequent resets can translate small market moves into noticeable changes in your monthly instalment.
Don’t overlook the lock-in clauses and clawback conditions. Know how long you are bound to the package and what costs you might incur if you refinance or redeem early. These terms can quickly turn rate savings into unexpected cash outflows.
Always ask upfront about repricing and conversion fees. Whether you plan to stay with your bank or consider refinancing later, clarity on administrative charges and “free conversion” promotions helps prevent surprises that can erode perceived savings.
Finally, review SORA trends before committing to a 1M or 3M package. Historical movements provide context for how sensitive your repayments might be to market fluctuations, enabling you to choose a package aligned with both your financial comfort and long-term cost expectations. Taking these steps ensures your decision isn’t guided by marketing, but by a clear, holistic understanding of what your home loan will truly cost.
The Real Price of Your Home Loan
Most home loans in Singapore cost more than buyers expect, not because banks are being deceptive, but because the real costs are hidden in the details — from daily interest accrual and compounded SORA to fees, lock-in clauses, and refinancing costs. Focusing solely on the headline rate is like judging a book by its cover: it gives a sense of price, but not the full story.
The structure of your loan — how interest is calculated, how often it resets, and what penalties or fees apply — matters far more than surface numbers. Understanding these mechanics empowers you to anticipate how costs evolve over time, rather than being caught off guard by rising instalments or hidden charges.
By asking the right questions and comparing loans based on Effective Interest Rate, SORA type, lock-in conditions, and total fees, you position yourself to make choices that genuinely minimise long-term cost. In other words, informed comparison isn’t just a smart strategy — it’s the key to saving tens of thousands over the life of your mortgage and ensuring that your dream home doesn’t come with an unexpected financial burden.
Find Out What Your Home Is Really Worth Today?
Get a data-driven property valuation in minutes, backed by the latest URA & HDB transactions and market trends. Whether you’re planning to sell, buy, or refinance, knowing your home’s true worth gives you the confidence to make smarter decisions.
