Hi everyone, today we’re talking about conspiracies against the public. What’s that? Proper terminology? Oh in that case, we’re talking about home loans. The home loans market is a mess of conflicting opinions, for one main reason: Some bankers count on market inefficiency to sell loans. That’s a polite way of saying they make money out of you not knowing things. There are of course tools out there that can help you decide on a home loan package if you know nothing about it. And in this article, I try to even the odds a little for you:
Five Details That Matter
If there was a Home Loans Monthly magazine, it’d be illegal to read it aloud. The resulting boredom would send half a district into a coma.
So it’s not surprising that most people don’t keep up with home loans; not until they need one. Then they wander into the market wide-eyed and confused, like Bambi staring down the barrel of a shotgun. The lucky ones pick through the banker’s jargon, and realize:
- The Main Difference Between SIBOR and SOR
- What the “X” Months in Front of the Interbank Rate Means
- Fixed Rates in Singapore Don’t Last the Entire Loan
- Variable Rates May Not Be Transparent
- Property Agents Get Paid When They Refer You to Bankers
1. The Main Difference Between SIBOR and SOR
SIBOR and SOR are both interbank rates.
SIBOR (Singapore Inter-Bank Offered Rate) tracks the rate at which local banks lend to each other. Almost every country has its own counterpart, such as JIBOR (Jakarta Inter-Bank Offered Rate) in Indonesia, and the now notorious LIBOR (London Inter-Bank Offered Rate) in the UK.
And before you ask, no, SIBOR is not as easy to “fix” as LIBOR. SIBOR rates are based on transactions, whereas LIBOR rates were based on hypothetical estimates (read: whatever the hell their bankers felt like).
SOR (Swap Offer Rate) is based on foreign exchange rates, between the US dollar and Singapore dollar. You can check the SIBOR or SOR rates yourself.
With some exceptions, SIBOR and SOR move in tandem. When SOR rises, SIBOR tends to rise. When SOR falls, SIBOR tends to fall. So what’s the difference between them?
SOR is sensitive to global market shifts. Because SIBOR is local, it responds more sluggishly to changes outside Singapore. So when the SIBOR rate moves, it does so by a smaller margin than the SOR rate.
As an example:
On 2 July 2012, the SIBOR rate was around 0.38%. A month later, on 1 August 2012, the SIBOR rate was around 0.37%. That’s a movement of about 0.01%.
On 2 July 2012, the SOR rate was also around 0.38%. On 1 August 2012, the SOR rate was around 0.35%. That’s a movement of around 0.03%. Note that SOR’s margin of movement was three times greater.
That makes SOR better suited to risk-takers. When the SOR rate drops, you save more money compared to SIBOR. But when the SOR rate rises, you also lose more.
2. What the “X” Months in Front of the Interbank Rate Means
A SIBOR or SOR rate is expressed with a number of months in front of it. For example, a loan package could be based on “3 months SIBOR”, or “1 month SOR”.
The number of months determines how often your interest rate is “refreshed”. If you take a 1 month SIBOR, for example, your interest rate will adjust to match SIBOR every month. That means your loan repayments can be different every month. If you take a 3 month SIBOR, your interest rate will only adjust every 3 months.
Interbank rates can come in 1, 2, 3, 6, 9, or 12 month rates. However, most home loans will only use a 1 month or 3 months rate.
In general, 1 month SIBOR / SOR tends to be cheaper during a down trend (when interest rates show a pattern of falling). During an up trend, the opposite is true.
3. Fixed Rates in Singapore Don’t Last the Entire Loan
In other countries, fixed rates can last the entire loan tenure. Your loan repayments could be the exact same amount, from year 1 to 30. But that’s too unexciting for Singaporeans.
In Singapore, most fixed rate packages last three years. After that, you’re back on a floating rate. The only way to “extend” your fixed rate is to refinance. You need to find another bank that’s offering a fixed rate, and then switch your loan to that bank.
If you insist on fixed rates, it’s advisable to start looking toward the end of your third year; this will give you time to compare rates. You can find the information on free loan comparison sites like MoneySmart.
Or follow us on Facebook; we’ll let you know when we see interesting loan packages.
4. Variable Rates May Not Be Transparent
In Singapore, the term “variable rate” often means a loan package which uses neither SIBOR nor SOR. Instead, such packages are tied to a IBR (Internal Board Rate).
Each bank manages its own Internal Board Rate. Banks sometimes disclose the history of their board rate, in an attempt to convince clients. But for the most part, there is little transparency in a variable rate. Likewise, banks do not need to justify movements in their board rate; this is different from SIBOR or SOR, which are public and regulated.
I’m not implying that banks lie about their board rates. I’m implying it’s easy if they want to. So while a board rate may seem cheap, just ask yourself: How much do I trust this bank?
5. Property Agents Get Paid When They Refer You to Bankers
Property agents can be demanding with regard to bankers. Sometimes they’ll threaten to raise prices, or to let a deal fall through, unless you use “their” banker.
That’s because the agents want a referral fee. When your agent directs you to a banker, and you get your home loan from that banker, the agent gets paid for it. Problem is, the property agent might not care that you’re getting a bad loan.
When your property agent refers you to a banker, always get a second opinion. Compare home loans yourself, and find the best deal.
What do you want to know about home loans? Comment and let us know!
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