One of the most common questions people face when it comes time to look into refinancing is what kind of home loan refinancing rates to choose. If you do a bit more research rather than just asking a friend who has “done it before last time”, you’ll realise that there are numerous options that will leave your head spinning out of control like a teen superstar’s private life.
The most common question and one you’ll definitely be wondering about, is whether to choose a fixed rate or a floating rate. If you don’t know what each rate is or does, find out more about SIBOR or SOR rates in Singapore here.
Should you go for stability and get a fixed rate? Should you throw caution to the wind, along with all the property analyst reports you’ve been reading, and get a floating SIBOR rate? Let’s organize your thoughts.
What Happens If You Get A Fixed Rate?
Most banks will structure their fixed rates in 2 or 3 year time frames. What this means is that you will get a fixed interest rate, which is not affected by the SIBOR fluctuations, for either 2 to 3 years, depending on the bank. There are, in very rare cases these days, fixed rates that extend up to 5 years (DBS currently) but nothing more than that.
Why not, you may ask?
Because the banks are filled with intelligent analysts that don’t get bonuses when you get too good a deal as a customer.
The benefit of this fixed rate for 2 – 3 years is that you can rest easy at night, knowing you aren’t going to wake up tomorrow to a SIBOR rate that’s gone up to 4%. The bank will protect you from this fluctuation for the fixed rate period.
Your monthly payment deductions are also constant and predictable during this time, unlike borrowers on floating rates that may change every month or every 3 months depending on the SIBOR rate they are on. This does make planning monthly finances a bit easier and less stressful, especially those of you who top up the account with cash every month to meet the deduction deadline.
As with all good things, this doesn’t last forever and every fixed interest rate package on the planet eventually becomes a floating rate after the fixed period.
What Happens When The Fixed Period Is Over
When the package converts itself back into a floating rate, you will be met with either the SIBOR rate to deal with (most banks will make a 3 month SIBOR + 1.25% after the fixed rate) or a Board / Variable rate (its usually crazy high, like 2.75% kind of high ).
This means you must refinance, or will be itching to refinance and that’s when you find out whether you made a good call 3 years ago. If the SIBOR did indeed start to rise, you found protection for 3yrs.
BUT…
If all the analyst reports are correct and SIBOR does increase over the next 3 – 4 years, you will still have to choose a refinancing package that’s going to be much higher than what all the banks are offering as of today. Danger zone!
What Happens If You Choose A Floating Rate?
And by floating rate, we really mean a SIBOR rate, as its always best to avoid a Board / Variable rate whenever possible. (That’s a story for another day.)
Typically, banks will offer you the following formats for SIBOR based floating rates:
Option 1
Lowered spread / margin for the first 3 years, than raised spread from the 4th year onwards thereafter.
Example:
Year 1 = 3mth SIBOR + 0.85%
Year 2 = 3mth SIBOR + 0.85%
Year 3 = 3mth SIBOR + 0.85%
Year 4 = 3mth SIBOR + 1.25% till end of tenure.
Option 2
No change in spread / margin for the full duration of the tenure, otherwise known as a Throughout Rate.
Example:
3mth SIBOR + 1% throughout the entire loan tenure.
The Most Important Part
What to note as a borrower is that both these options have benefits, depending on the perspective you choose to take as a person subject to the ups and downs of the SIBOR.
If you choose to ignore all the speculation that the SIBOR is going up soon, then you will end up choosing option 1 as it will give you the lowest margin for 3 years and you will then refinance again in the 4th year. Easy peasy, but not really. Again, you have to consider that if the SIBOR really does increase by a lot in the next few years, than the bank rates you will have to choose from to refinance to in 3 years time will be a lot higher than they are now.
Which leads to the argument for option 2, which is the slightly safer option. You do not get as low a rate in the first 3 years, but your margins are the lowest from 4th year onwards, and definitely lower than the 1.25% in first option.
What you also get is the same option to refinance again 3 – 4 years later (depending on if you have a lock in period). At least in the case of option 2 where your margin maintains at 1% throughout, if you cannot find anything better on the market than a 1% margin 3 years later, you don’t have to change.
So which is better, fixed rates or floating rates when refinancing? After what we have discussed, there is no one answer to this question. You’ll never be able to fully escape the SIBOR no matter which you choose, and thus have to make a decision on what you want to risk moving forward with the speculated increase in the SIBOR. You can find out what current refinancing rates in the market are at MoneySmart.