These days, it almost seems like the fluctuations from SIBOR are directly correlated to Singaporeans’ measure of happiness. Sure, we might supposedly be the lowest country on this strange Misery Index, but we’re quite sure many Singaporeans might beg to differ. And with the US Fed set to gradually increase their interest rate, this might have a significant impact on SIBOR in the months to come. So how does this affect Singaporeans and what should they do about their home loans should SIBOR go up?
Just one minute… what is the SIBOR and why should I be worried that it’s going up?
The SIBOR is short for the Singapore Inter-Bank Offer Rate, and it’s predominantly used as a benchmark rate for property prices in Singapore. The SIBOR is determined by the Association of Banks in Singapore, and is based on the interest rates used by banks in Singapore when lending money to each other. Most home loans, in Singapore are based on the SIBOR.
That means, if the SIBOR is going up, your monthly home loan repayment is going to start costing you more.
What? Didn’t anyone see this coming? What has it been doing in the past?
The SIBOR has remained low in Singapore since 2008. Over the past 7 years, it’s ranged between 0.3% and 1%. This is mainly because of the connection between the US Federal Funds Rate and the SIBOR. The US Federal Funds Rate has remained at an all-time low over the past 7 years. But with the US Fed having announced their plans to slowly increase their interest rate, this is quite a significant indication that SIBOR is also set to go up.
Of course, with the 1-month SIBOR currently at 0.75%, it is still nowhere close to the record levels of 3.562% in 2006.
(Update: The Fed finally increased interest rates on 17 Dec by 0.25% in a move expected to gradually increase to 1.4% by the end of 2016).
Aiyah… you’ve made me kan cheong already! How? What should I do with my home loan now?
Firstly, don’t panic! Your home purchase is probably the biggest transaction you’ve ever made in your life, so you’ll want to make sure you have enough information to make an educated decision on how to proceed from here.
At this point, I do need to note: the 3-month SIBOR and the 1mth SIBOR associated with your home loan is based on the SIBOR at the start of the month. Just because it’s reached a 7-year high this week doesn’t necessarily mean it’s going to start shooting up as it may not affect you immediately. Still, eventually it will once levels normalize at a new high and your loan interest rate refreshes at the new level.
Here are the 2 options you have should the SIBOR increase.
1. Refinancing your home loan
Refinancing means to transfer your home loan from the bank you’re with to another bank. Why would you do this? Mainly because of the interest savings that usually come with the switch.
When it comes to refinancing there are mainly three options on the market: board rates, fixed rates and floating rates. Board rates are a version of floating rates, but typically are not recommended as they could “sabo” you at a later date if you’re not careful.
Board rates
Board rates are essentially determined by some obscure and (usually) non-transparent method by the bank. It probably involves bloody animal sacrifices if you ask me. The problem that most don’t realise with board rates are that they bank retains the right to change this interest rate you pay, any point in time, at their discretion.
While most banks will tell you that they have not done so in the last 8 years, do you really want to run that risk? Also most board rates are low or market competitive from the 1st year to the 3rd, after which they move up to much higher interest rates from the 4th year and onwards.
This forces you to have to consider refinancing or repricing your loan, or risk being stuck with some very high monthly payments and being the bud of home loan jokes at your family BBQs.
Fixed rates
Fixed rates are interest rates that are determined by the bank for a stipulated period of time. For example, the interest rate for your home loan for the first three years are 2%. It will not change, no matter how high or low the SIBOR becomes. Most fixed rates will only last 2 to 3 years at best. However, during this period, you can rest easy knowing that your monthly repayment amounts remain the same.
Naturally, because the rate is secure for the fixed duration, these rates will be more expensive than floating rates as they bank charges a premium for this “security”.
Obviously, the best fixed rates are the ones that are lowest and last the longest. However, you will be “locked-in” to the bank for this period of time and you will be penalised should you try to repay your loan in part or in full during this fixed duration. You won’t be able to refinance with another bank during this time either without being penalised.
Also, you’ll want to make sure that when the lock-in period is over, that it converts to a reasonable floating rate. The last thing you want is a floating rate so high that you’re forced to consider refinancing again.
Floating rates
Floating rates are interest rates that are based on the SIBOR. If you are still reading this article, it probably means you’re currently paying off a floating rate home loan and you’re shitting bricks at the thought of your monthly repayments going up.
For floating rates, you’ll want to look out for packages that offer low spreads. A typical floating SIBOR rate looks like this:
Year One : 1mth / 3mth SIBOR + 1%
The 1% is known as the spread. Also check how long the spread is for – it usually rises dramatically in the 4th year. Since banks cannot control the SIBOR, it is also this spread where banks will compete with each other for your business, with higher or lower figures to entice you.
Other considerations
The important thing to remember is that no matter which option you choose, you will never be able to avoid the SIBOR completely. That’s because even a fixed rate will eventually convert to a floating rate (or a SIBOR-influenced board rate) after the lock-in period is over. If you’re planning to sell your house soon, you would probably want to look at packages with no lock-in period.
You’ll also want to make sure you only apply for packages that have legal subsidies. If not, refinancing may actually not be cost effective. For example, if refinancing will save you $3,000, but your legal fees cost $3,500, then it’s clearly better not to refinance.
That was a lot to take in… how about you just tell me what some of the packages are like now?
Case Study 1: You have an outstanding loan of $600,000 on a private property with a bank. Assuming you’re now paying 2.6% on your loan currently and have 27 years left on the loan, you could be saving up to $260 a month by switching to a DBS FHR loan. (no legal subsidy though). Alternatively, you could save up to $180 a month by switching to a fixed rate package with Bank of China.
Case Study 2: You have an outstanding loan of $1.2 million on a private property with a bank. Assuming you’re now paying 2.6% on your loan and 27 years left on the loan, you could save up to $500 a month by switching to a fixed rate package with SCB. You could also save up to $480 a month by switching to a floating rate package with Citibank.
Case Study 3: You have an outstanding loan of $150,000 on a HDB flat with a HDB loan. Assuming you’re now paying 2.6% on your loan, you probably should stay with HDB. Refinancing when your loan amount is so small would mean not getting any legal subsidies. The amount you save on interest would probably end up going into paying legal fees, so it’s not worth it.
Case Study 4: You have an outstanding loan of $450,000 on a HDB flat with HDB. Assuming you’re now paying 2.6% on your loan and have 27 years left on the loan, you could save up to $180 per month with Citibank.
*Estimates based on todays prevailing SIBOR rate, the actual figures will factor in things like your age and loan tenure of your current loan. This is just to give you an idea of what the savings could be given your loan size.
Sounds good, but what other costs are involved?
A valuation report is needed for all bank loans and can cost up to $500, depending on the property type. There are also legal fees – these vary depending on whether you use the bank’s lawyers or hire some privately. Expect to pay up to $3,000.
Therefore, it is very important to make sure you get a loan package that comes with a legal subsidy.
2. Repricing your home loan
Repricing is similar to refinancing, except you don’t change the bank you’re with. The costs may be cheaper, because you save on legal and administrative costs. You can expect to pay around $500 if you reprice.
However, the offer your bank makes might not be in your best interests. For example, even though you pay less in legal costs, you might end up not saving as much compared to if you refinance. Remember to think long-term.
Okay, I think I’m going to go for refinancing! How long does it take?
Whoa… hold on! First you need to get your documents together. Check with the bank you’re keen on what documents you need. For example, you may need to find the original letter of offer from your bank, to calculate the maximum tenure they can offer.
Refinancing does take a while. Getting an approval for the refinancing at the new bank may take up to two weeks, but more importantly, you will need to serve a 3 month notice at your current bank. It might therefore be a good idea to start the refinancing process 3 months before you know your interest rates are going to go up.
Need help looking for good long term home loan packages? You can look for home loan refinancing at MoneySmart.