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Guide to MUST ‘Dos’ & ‘Know’ for Home Loans
FIRST: Know the Terms
Differentiate between the different interest rates.
Based on the bank’s rates at the time of application. During the first few years of the mortgage loan, the interest rate is fixed.
Example: Fanny applied for a mortgage loan with a Bank at a fixed rate of 1.48% for the first 3 years. This means that she will be paying an interest rate of 1.48% per annum for 3 years.
Floating rates (SIBOR or SOR):
Normally banks will charge a spread in addition to the SIBOR or SOR rate.
The Association of Banks in Singapore sets the Singapore Interbank Offered Rate daily. Based on the unsecured funds/rates that banks and financial institutions in Singapore borrow from each other.
Example: SIBOR Rates: 1M SIBOR – 0.35%, 3M SIBOR – 0.4%
The Association of Banks in Singapore also sets Swap Offer Rate. Based on the expected forward exchange rate between the US dollar and Singapore dollar.
How both SIBOR & SOR work?
Most Singapore’s banks provide either SIBOR or SOR rates for their mortgage loan packages.
In Singapore, most banks offer housing loan packages pegged to either SIBOR or SOR rate. You can think of it as the “cost price” for the bank. They will then add a margin on top of their cost price. This is called a spread. (eg. 3 month Sibor + 0.8%)
SIBOR and SOR allow you to choose to lock-in the rates for 1 month, 3 month, 6 month, 9 month or 12 months. If you choose a 1 month SIBOR, it simply means, this current month’s 1M SIBOR rate might be 0.35%, but next month’s 1M SIBOR rate might be 0.32% or 0.37%. So you will expect the monthly instalment to be higher or lower.
Example: Jan = SIBOR 0.35% + 1% , Feb = SIBOR 0.32% + 1%
Alternatively, if a 12 month SIBOR is chosen, which usually has higher rates, the rates if at time of application for SIBOR is 0.59%, this rate of 0.59% will remain for the whole 12 months regardless of the fluctuations in the market. A longer lock-in of SIBOR rates provides more stability but might be paying higher rates comparing to a 1/3/6/9 month SIBOR.
Example: Jan= SIBOR 0.59% + 1%, Feb = SIBOR 0.59% + 1% …. Dec = SIBOR 0.59% + 1%
A 3 month SIBOR will be a good choice to have best of both worlds of enjoying the low rates and also at the same time being less affected by the fluctuations.
SECOND: Know the Pros & Cons
Provides stability and ease of mind. Rates normally will not fluctuate in the first 3 years. Thus, the monthly installment will be a fixed amount.
Rates might be higher than floating rates especially in the current market environment. Thus, you might be paying more ‘$$’ monthly.
Might help you to save lots of ‘$$’ on the interest throughout the loan tenure of the mortgage loan.
Installment payments vary as it fluctuates up or down depending on the market. Suited more for higher risk threshold customers and depends on the respective bank’s mortgage loan interest rate.
SIBOR AND SOR VS BANK BOARD RATES
If you have chosen floating rate packages for your home loan, you will have to decide on a package that is pegged to SOR, SIBOR, or rates that fluctuate based on the bank’s board rate at its sole discretion.
|SIBOR||SOR||BANK’S BOARD RATE|
|More Stability||More Volatile||Subject to changes|
|Higher rates (As of now)||Lower rates (As of now)||Higher Rates (As of now)|
|Pegged against cost of lending of the banks to each other||Pegged against the movement of the US currency||Bank has the discretion to change the rates anytime and it is not as transparent as SIBOR & SOR|
NOTE: Do take your time to consider carefully regarding which home loan package and interest rate is the best choice. Transparency in interest rates is the key deciding factor in choosing between banks or financial institutions. There is higher risk involved if you choose a floating rate package that is pegged to Board rates which is set by the bank.
THIRD: Choose between Fixed or Floating Rates
Now you should have a better idea of Fixed and Floating Rates. So decide on which interest rate package you prefer. If you are choosing Floating Rates, decide between SIBOR or SOR rates and the lock-in period for the rates as mentioned earlier in “Guide to MUST ‘Dos’ & ‘Know’ for Home Loans” under the First step.
FOURTH: Calculate Monthly Installment
If you have decided on the package that you prefer, use our mortgage calculator to calculate an estimated monthly instalment for your refinancing/new loan.
Alternatively, Contact us and we shall get our professional bankers alliances to assist you. NO COST INVOLVED! So SMS/CALL/EMAIL us NOW!