When picking a home loan package that is pegged to the SIBOR, you will typically be offered a choice of different rate structures: 1 month SIBOR, 3 month SIBOR, etc. This can be confusing to first-time home buyers, who don’t understand the implications. Choosing the right rate structure can impact your financial planning, and the overall long-term cost of your loan. In this article, we examine the difference between the two most common structures: 1 month and 3 month SIBOR rates:
What Does “X Month SIBOR” Mean?
The number of months listed in front of the SIBOR rate determines how often the rate is renewed. You can find out more about the SIBOR in our previous article.
A 1 month SIBOR means that, every month, your home loan rate will be adjusted to match the prevailing SIBOR rate. A 3 month SIBOR means the rate is adjusted every three months. It is possible for a bank loan (not just home loans) to have SIBOR rates of 1, 3, 6, 9, and 12 months.
For home loans, the most common rates are 1 month SIBOR and 3 month SIBOR. Do note that bank loans for HDB flats only offer 3 month SIBOR.
Why Use Monthly Adjustments?
Banks use monthly adjustments to prevent speculative timing.
SIBOR rates change on a daily basis. If home loan rates were to fluctuate as often, borrowers would treat SIBOR like they would the stock market: We would have borrowers speculating on rates, and then rushing to get loans processed on specific days.
The end result would be accounting and administrative complexity, for both banks and borrowers. On the borrower’s end, it would mean you’re subject to increased fluctuations in the interest rates. Also, you’d have to track the market on a daily basis to “time” your loan application.
For this reason, banks simplify the process by using monthly adjustments.
The rate for the month is typically the SIBOR rate on the first business day of that month. So if the SIBOR rate on first business day of a particular month is 0.32%, everyone who signs up for a loan on any day within that particular month gets the same 0.32% rate.
Note: Some banks will use the month that the letter of offer is signed as the starting month to get the SIBOR rate while some will use the month that the loan is disbursed (usually 3 months later).
Which is Better, 1 Month or 3 Month?
This depends on the current direction of interest rates. When SIBOR rates are falling, a 1 month rate will be cheaper than a 3 month rate. However, if interest rates are rising, the opposite is true.
1 month SIBOR rates adjust very quickly, whereas a 3 month rate takes time to adjust. So if SIBOR is falling month-on-month, the 1 month SIBOR would match the plunge, causing your home loan to cost less.
But if SIBOR is rising, the 1 month rate would match it and rise just as quickly. Conversely, a 3 month SIBOR would maintain the lower rates from previous months.
Note that choosing a 1 month or 3 month rate is just one way to lower home loan repayments. For more such tactics, follow us on Facebook and we’ll update you.
I am Getting a Loan Now, Which Should I Pick?
At present, analyst believe that the SIBOR rates have bottomed out. We’re at a 10 year low, and it’s improbable that SIBOR can fall any further. Due to the global economy and quantitative easing, the currently low rates might persist till 2013 – 2015.
But if you believe SIBOR rates can still fall (or at least not rise), you might want to try for a 1 month SIBOR anyway. There may still be price dips to capture in the next two to three years; but you’d best prepare to refinance after that.
Otherwise, a 3 month SIBOR provides greater stability. Should the interest rates start to climb, at least the process will be slower for you.
Would you prefer a 1 month or 3 month SIBOR? Comment and let us know!