What Are Bank Home Loan Rates Based On And How Do You Decide What Is Best?
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Buying a home is a huge and often times tedious task, and figuring out how to finance what could possibly be the biggest purchase of your life is something that you shouldn’t just take lightly.
What many people may not realise is that not only do bank home loan rates change over time, but that there are different loan packages that are based on different benchmarks. These benchmarks work in different ways and can impact how much interest you are paying. Here’s a look at the 3 most common ways that home loan packages that don’t offer a fixed rate are determined:
Mortgage Board Rate Home Loan
Board rates have been around for a pretty long time, and are home loans where the interest rate is completely arbitrary. The formula for determining the interest rate is at the bank’s complete discretion, and not known to the public. This can certainly be a scary thing for anyone who is wanting to manage their finances, especially a loan as big as a home loan.
The way in which a board rate is structured means that the bank technically has the right to change it anytime they want, as long as they give you a month’s notice. Because of this, we encourage customers to think carefully before going with board rates.
SIBOR-based Home Loan
SIBOR, or the Singapore Interbank Offered Rate, is the interest rate used by banks in Singapore when lending unsecured funds to one another. Simply put, SIBOR reflects how much it would cost banks to borrow from each other. This is the basis by which these home loan packages are pegged to as well.
These packages mostly use 1-month SIBOR or 3-month SIBOR as a peg, and charge an additional spread on top of it e.g. 3-month SIBOR + 0.70%. This peg determines how volatile your home loan will be. 1-month SIBOR home loans are more volatile since they can (and will!) change every month, while 3-month SIBOR home loans are slightly more stable since they only change every 3 months.
However, the 3-month SIBOR is usually higher than the 1-month SIBOR. Once again, you’re paying a bit more for added stability. SIBOR tends to be influenced by global economic factors, especially the movement in interest rates set by the US Federal Reserve. Here’s a short explainer as to what you should know about SIBOR rates in 2018
Fixed Deposit-linked Rate Home Loan
A Fixed Deposit (FD)-linked home loan refers to home loan packages where the interest rate is linked to a bank’s fixed deposit account interest rate for a specified tenor e.g. the interest rate for a 8-month fixed deposit. If those interest rates go up, so do the home loan interest rates.
DBS pioneered this product back in 2014 with the Fixed Deposit Home Rate, better known as the FHR, and this has evolved several times over the past few years. It has also seen quite a number of other banks follow suit and come up with similar products.
One of the reasons why FD-linked home loan packages are so popular is because of its relatively low volatility, as compared to the historically popular SIBOR-based home loan interest rates.
This is because raising the fixed deposit interest rate represents a cost to the bank. This is because when banks increase their FD rates, it means that they have to pay out more interest to their depositors.
So which package should you choose?
The choice of home loan package really depends on several factors, but one of the key factors is your risk appetite. Most people who prefer a more stable home loan tend to opt for FD-linked packages or fixed rate packages (but it’s important to note that fixed rate packages eventually revert to a SIBOR-based or FD-based package).
For those people who feel like that they can stomach the swings and volatility, they might have previously taken a chance with a SIBOR rate but, as an example, the 3-month SIBOR has been significantly higher compared to the earlier part of 2018, and as we mentioned in the video, there is a high chance SIBOR is going to keep rising.
As we are in a rising rate environment, your home loan interest rates are very likely to increase. If you are the type who wants to know how your home loan interest rate is determined and what would cause it to change, board rates may not be suitable for you. You might want to consider opting for Fixed/SIBOR-based/FD-linked packages.
If you are interested to review your home loan or even find out more about the different benchmarks, you can easily hop on over to DBS’s home loan page.