If you have a mortgage loan with a bank, you should get worried. Because the mortgage interest you are paying is going to be more than double of what you have paid last year.
To many people, the interest rate used to be something you can neglect. It used to be that 0.25% pathetic savings rate which the banks reluctantly credit to you, or the 0.6% to 0.8% fixed deposit rate which makes you move your money from one bank to another.
But if you are a homeowner, the interest rate you should concern now is Sibor (Singapore Interbank Offered Rate). This is because, in Singapore, most home loan packages are pegged directly to Sibor or Sor (Singapore Swap Offer Rate). When Sibor or Sor increases, your mortgage interest rate increases and so is your monthly mortgage payment. Do you know how much Sibor has increased last year?
It doesn’t matter whether you like it or not, you have two options:
- Option 1: Be prepare to pay a higher monthly mortgage payment
- Option 2: Refinance your home loan now
How much are you affected by the rising Sibor rate? How many types of home loan package are there? Which one should you choose? Let me explain.
Why rising Sibor rate affects you
For more than 5 years, interest rate, represented by Sibor, was like dead water. But since Jan 2015, it shot up like a rocket.
Most people’s mortgage interest is calculated as Sibor rate plus a “spread”. The spread is what the bank earns and was typically 0.7% to 1.0% in the past few years. As banks always try to entice you to sign up their home loan, they typically offer a lower spread for the first one or two years and a higher spread from third year onwards.
Assuming you signed up a floating home loan 2 years ago
- Your last year’s mortgage interest: 0.3% Sibor + 0.8% spread = 1.1%
- Your mortgage interest now: 1.1% Sibor + 1.0% spread = 2.1%.
That means now you are paying 90% more interest than last year. And this is just the beginning…
Understand Fixed Rate and Floating Rate
There are various ways in which a home loan interest rate is calculated in Singapore. It is important to know the difference between fixed rate and floating rate.
Fixed interest rate means that you have signed an agreement with the bank to keep the interest at a set rate. The bank will guarantee that the interest rate will not change for a specified time period regardless of the market conditions.
On the other hand, floating rate is a variable interest rate that is often based on the Sibor rate or SOR rate. The rates are measurements of how different financial institutions are lending to each other. When you have a floating interest rate, your interest depends on one of the two rates. Your interest rate might go up or down along the way.
For the latest refinancing home loan packages, you can check here.
The last home loan interest hike was not long ago
Those that fail to learn from history, are doomed to repeat it. – Winston Churchill
During that period, floating home loan owners were badly affected by the sharp increase of Sibor. For people who thought that they could refinance their home loans to fixed rates, the banks raised their fixed rates as high as nearly 4%.
The lesson learned was that if you want to lock in your mortgage interest rate, you have to refinance your home loan now, not after the interest rate goes up.
3 types of home loan packages
To decide which home loan package to refinance to, you have to know that there are three main types of home loan rates in Singapore.
- Home loan rates that peg to Sibor or Sor
- Board rate
- Fixed deposit home rate (FHR)
SIBOR and SOR pegged Rate
It is important to know the difference between SIBOR and SOR because they act as benchmark rates for private and commercial property prices in Singapore. You can easily check the current Sibor rates here.
Sibor is based on the interest rates utilised by banks when lending to each other. It is administered by the Association of Banks in Singapore and the rates from 17 banks are compiled by Thomson Reuters on a daily basis. Most of Singapore’s home loan interest rates are based on Sibor.
SOR is based on the currency exchange rate with the US dollar. Home loan rates that are based on SOR will cost the same amount of money when converted into US dollars. The SOR depends on the economic state of the US. There are very few banks in Singapore that use SOR for their mortgage rates.
The best Sibor home loan package is probably Standard Chartered Bank’s MortgageOne. This is a package with Interest Offset Feature.
- This feature pays 2/3 of your deposits in the bank the same interest rate as your mortgage loan.
- If home loan rates go up, so is the interest for your money in the bank.
- You can potentially offset up to 100% of your home loan interest.
- This will not only give you cash liquidity but also free up funds for the emergency or other investment opportunities.
You may ask why you want to take up the loan if you already have cash. I have explained in one of my earlier posts that the property gurus always use optimal leverage when they purchase properties. There is nothing to be proud of if you have no debt. It may mean that you did not make good use of your money.
Some home loan packages are based on banks’ own board rate, instead of depending on the transparent Sibor or Sor. The rates depend on how much the banks are lending, their operating costs, and how much they are earning. I am not a fan of such packages because their home loan interest rates often go up and down with no sign of warning.
Fixed Deposit Home Rate (FHR)
FHR (Fixed Deposit Home Rate) is unique to DBS Bank. Mathematically, it is computed as the average of the bank’s 12- and 24-month fixed deposit interest rates. The home loan interest rate is FHR plus a spread similar to Sibor pegged rates. FHR depends on the bank’s fixed deposit rates.
DBS has managed to attract customers for this offer because FHR is somewhere between Sibor pegged rate and board rate. Because of low deposit rates now, FHR appears to be very attractive.
However, because FHR is very new and still depends on the banks’ policies. Nobody is sure how it will change when the interest rate really goes up. What I have noticed is that, recently, instead of raising FHR, DBS has raised the “spread” significantly for new home loans, so the sustainability of such rate may be questionable.
Refinance home loan if you can
I have been monitoring the interest rate movements closely. Banks are starting to withdraw their fixed rate home loan packages from the market. That could be a sign that they are unwilling to lock themselves with you for a fixed mortgage rate. And you should just do the opposite, grab the best fixed-rate if you can.
It is important to find the best home loan that suits your financial situation. Now all signs indicate that the interest rates are sure to go up, you should refinance as soon as you can.
If you have any question about home loan refinancing or how to compare the home loan packages, leave your comments below. If you want to know the trends of home loans rates and how your mortgage payments are affected, you should subscribe to my weekly newsletter to receive the information right in your inbox.
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