The SIBOR recovery is no surprise – mortgage rates in Singapore have been steadily increasing in the past year. A few months ago, we even talked about how the fixed rates were sluggish to catch up to the floating rates, making it the perfect time to capitalise on the relatively low fixed rate housing loans offered by banks.
But if you missed that boat, too bad – it’s probably not coming back.
2019 Mortgage forecast – fixed vs floating interest rates
In December 2018, the bank’s fixed rates officially surpassed the 2.6% HDB housing loan rate, and now, the gap between fixed and floating rates have more or less “normalised” to >0.5%. With the widening gap, floating rates are definitely looking increasingly attractive.
They’re currently pretty viable at around 2.1%; not to mention, they offer much more flexibility in terms of loan prepayment. Also, floating rates generally come with free conversions (should the peg move).
So yeah, if you’re hunting for a good bank mortgage, you should definitely consider getting one with a floating interest rate.
Here’s a comparison of the 3 types of floating rates and their indexes. Fixed rate is also indicated for reference.
|Type of mortgage rate||Pros||Cons||Who should take it?|
|Fixed rate||Stable, protects you from further increments||Currently higher than floating rates||Those who want stability & peace of mind|
|Board rate (floating)||Unlikely to increase the rates too often for fear of backlash, typically increases quarterly||No transparency, seems to only ever increase||Those who fully trust the bank|
|SIBOR/SOR-pegged floating rate||Relatively transparent, can check published rates online, spread is currently underpriced at 0.25% to 0.30%||Volatile, affected by the U.S. fed rates||Those who don’t mind the risk and want the lowest rates|
|Fixed deposit home rate (floating)||Somewhat transparent because FD rates are published & regulated by MAS||Not pegged against the best FD rates, rates still internally determined||Those who fully trust the bank|
Most stable mortgage package – fixed rates (currently >2.6%)
Lowest home loan package – SIBOR/SOR-pegged floating rates (currently ~2.1%)
Most transparent mortgage package – SIBOR/SOR-pegged floating rates
Types of floating interest rate packages for housing loans in Singapore
1. Board rates – expensive, and not transparent
This is the oldest, most traditional type of mortgage package. Loans were pegged to this before the spike in popularity of SIBOR/SOR packages from 2007 to 2008 onwards.
Board rate mortgages are pretty much obsolete now because not only are the rates lousy, there is little transparency in the index. The board rates are entirely internally determined, which means the banks are in full control of the rates for the entire duration of your lock-in period.
They don’t need to explain or justify any increase – it can be as high as 0.3% to 0.7% per round of adjustment, and all you’ll get is a letter of notification 1 month prior.
Also, while “floating rate” suggests it can move both up- and downwards, board rates seem to only ever go up. Sian.
The silver lining is that banks only tend to increase their rates quarterly, which makes it slightly less volatile than say, 1-month SIBOR rates. But then again, since the rates are fully controlled by the bank, nothing’s really stopping them from simply increasing the rates by a larger margin albeit less frequently.
2. SIBOR/SOR-pegged floating rates – attractive rates, as transparent as it gets
As their names suggest, these mortgage packages are pegged to SIBOR/SOR rates. This offers consumers the transparency they want because not only are all the rates published, this market index isn’t controlled by the bank so they cannot change it at their whim and fancy, according to their needs.
It also keeps the spread across various banks competitive, because they’re all pegged to the same index.
Banks carry 1- and 3-month SIBOR rates, which means your rates change every 1 or 3 months, according to the index of the day. You’ll know exactly why your instalments increase and if you gan chiong spider, you can track the index performance online.
Unlike board rates, SIBOR doesn’t just move in one direction, too: They can drop, and you’ll benefit from it when it does.
In a normalised market, you can expect about a 0.70% mark up, but it’s currently in the 0.25% to 0.50% range. Hence, the effective rate is about 2.1%, which is significantly lower (by ~0.80%) than a 3-year fixed rate package (~2.90%).
The downside of course, is that it’s volatile so there’s some risk involved. The U.S. fed has a huge influence on it, and the rates change fairly frequently (every 1 or 3 months).
3. Fixed deposit home rates (FDHR) – a “meh” choice
The last floating-type mortgage plan is pegged to fixed deposit rates (FD). There’s may be a false sense of security with this index because many consumers believe that it’s not in the bank’s interest to offer high FD rates, so the index will remain low and stable.
That’s not entirely true, because there are external factors (ahem*Singapore Savings Bonds*ahem) that compete with them and can absolutely push rates up.
Plus, banks rarely use their best FD rates to peg against anyway. Those rates are high, which are not only a huge turn-off to customers, but also leaves little wriggle room to inflate rates when needed.
Instead, they use tranches that have little to no deposits (due to the pricing), increasing them when the need arises. Think unpopular ones like 8- or 36-month plans with rates like <1% interest rates.
Conclusion – which type of mortgage package should you choose?
Personally, floating rates seem preferable to fixed rates due to the widening the gap between the package types.
I’m not saying that fixed rates are not viable. In fact, they are still good for their purpose, which is to protect against any further increments and give you peace of mind with fixed instalments for the next couple of years. Plus, there has been a launch of 5-year fixed rate packages, which is something we haven’t seen in over a decade.
However, you will probably save more with a floating package. With the current gap, it will take a fair bit of increments for floating rates to overtake fixed rates.
This is especially true for SIBOR packages, as the spread is underpriced at the moment. The SIBOR-pegged mortgage spread was mostly kept at 0.30% throughout. Meanwhile, the spread for other floating rates (like FDHR) have increased by as much as 0.8% to 1%.
Plus, SIBOR rates were relatively stable in 2018, and look set to remain stable in 2019. In 2018, the fed increased their rates 4 times (by 0.25% each time), but the SIBOR rate only increased by 0.40% in the same year. For additional reading, you may check out these reports by CNBC, The Guardian and Bloomberg.
Yes, you will expect fluctuations, but it is still a very decent proposition to consider. To protect yourself, you can look out for packages with short lock-in periods, flexibility for prepayment and sale redemptions, and very importantly, free conversions to switch out to other indexes should things go south.
Would you consider a floating rate for your housing loan? Tell us in the comments below!
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