2019 was the year of SIBOR’s recovery, but the recent emergency fed rate cut has officially tipped the scales. The Federal Reserve interest rate were cut by half a percentage point in March 2020, causing Singapore Interbank Offered Rate (SIBOR) to start dipping as well.
This is good news for those eyeing SIBOR-pegged mortgage rates, because since the banks have yet to react (by adjusting the spread to keep interest rates from falling too low), the interest rates are lower than they’ve been in months.
That makes it the perfect time to capitalise on the relatively low SIBOR-pegged housing loans offered by banks.
2020 SIBOR forecast — recent dip due to fed rate cut, expected to continue downwards
As most of you would know, SIBOR took a huge hit in the 2008 Financial Crisis. It also took a pretty long time to recover: SIBOR-pegged mortgages were especially affordable for a good decade; and it was only in 2019 that the index finally clawed its way back up.
Although there were a couple of Fed cuts in 2019 as well, SIBOR remained quite healthy last year. There was a lag in the SIBOR reaction to the rate cuts, so the Singapore mortgage rates were largely unaffected. Instead, the fixed rates started dipping, resulting in a market anomaly whereby the fixed rates were lower than the floating ones in 2019.
But that doesn’t mean that the effects of 2019’s rate cuts (on SIBOR) simply vanished into thin air… In fact, it seems to be catching up right about now.
The latest news is that in an attempt to contain the economic impact caused by the COVID-19 outbreak, the U.S. central bank recently made its biggest interest rate cut since 2008, slashing rates by 0.5% in March 2020. There’s even talk about the interest rate being cut to 0% or even going into the negative.
The above, coupled with the delayed effects of the 2019 rate cuts, have resulted in a significant dip in the SIBOR. The current SIBOR at time of writing now stands at 0.56% in June 2020, a drop of 0.41% from the previous month.
With this, mortgage rates in Singapore seem to actually be normalising. Floating rates are now lower than fixed rates, as they should be, making it quite an opportune time to take advantage of them. If you want to refinance your home loan now because of the low SIBOR, consider if it’s really cheaper.
Fixed vs floating home loan mortgage rates (2020)
So yeah, if you’re hunting for a good bank mortgage, you should definitely consider getting one with a SIBOR-pegged home loan interest rate.
Here’s an overview 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||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, but more expensive
Lowest home loan package – SIBOR/SOR-pegged floating rates
Most transparent mortgage package – SIBOR/SOR-pegged floating rates
Let’s go through the different mortgage packages and analyse their current viability.
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.
Verdict: Don’t do it — I can’t find any compelling reason to opt for this has-been of a mortgage.
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… Such as now.
In a normalised market, you can expect about a 0.70% mark up, but it’s currently in only the 0.15% to 0.30% range. The low spread is because SIBOR was recovering in 2019.
The banks are expected to eventually adjust this spread to keep mortgage rates from falling too low, but since they’ve yet to react — naturally, some lag is expected — home buyers can enjoy these low rates until then.
The downside of course, is that while these packages are attractive now, at the end of the day, it’s still volatile so there’s some risk involved.
You can go online and read all about market speculations, predictions, and yada yada… But if for some freak reason the peg moves upwards, you must be prepared to pay more.
Verdict: Personally, I recommend this. It’s fairly transparent, and the rates are low now.
3. Fixed deposit home rates (FDHR) — a “meh” choice
The last floating-type mortgage plan is pegged to fixed deposit rates (FD). There 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.
Verdict: Not the most competitive mortgage package, but better than board rates I guess.
Conclusion — which type of mortgage package should you choose?
Personally, floating rates seem preferable to fixed rates, at least for now.
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.
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, mostly kept at 0.15% to 0.30%.
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.
For those new to the whole idea of mortgages and home loans, it may be better to speak with an expert on the matter. If you want to talk to someone about home loan interest rates in Singapore, MoneySmart’s mortgage specialists can give you free and unbiased advice about the lowest rates in town.
Would you consider a floating rate for your housing loan? Tell us in the comments below!