For the average Singaporean, taking up a home loan would probably be as much of a rite of passage in life as say, needing to re-register your NRIC when you hit 30. Hello, adulting.
Thanks to the pioneering policymakers of this country, homeownership and the holy grail of “owning a stake in this country” seem firmly baked into the average Singaporean’s psyche.
To that end, taking up a home loan would probably be par for the course for most average Singaporeans. And if that’s you (or soon to be you), you would have probably come across enough acronyms (e.g. FHR8, 15M FDMR, SIBOR) and percentage signs in your search for the best home loan package to make you go:
Well, try not to blink too hard; and keep your eyes peeled — because in this article, we attempt to explain the common home loan interest rate packages on the market and how they work, and hopefully help you decide on which to opt for after signing on that dotted line.
The first thing you should know is that banks don’t lend you money for free (duh). Thus, the interest rate that you pay for your home loan reflects the cost of loaning money from the bank to pay for your property purchase, in the first instance.
All banks offer either a fixed or floating interest rate package. Read on to find out how they differ and which would suit you better.
Fixed interest rate home loans are rather self-explanatory because well, the annual interest rate charged on your home loan is essentially a — surprise, surprise — fixed flat rate (e.g. 1.84%).
Typically, fixed interest rate packages are fixed for a stipulated period of anywhere between two to five years, during which the interest rate is locked-in regardless of how volatile market conditions become. Thereafter, the fixed interest rate usually switches to a floating rate (more on that later) after the stipulated period ends.
Without a doubt, the upside of having your interest rate fixed for a stipulated period is, of course, stability and financial certainty. You will be shielded from any sudden surges in the interest rate environment (due to increasingly unpredictable political figures/events), and also be able to better plan your finances for the immediate two to five years while your interest rate is fixed.
The flip side of fixed interest rate packages, though, is that you will not be able to take advantage of any downtrends in the interest rate environment. This is something you must be prepared to forgo. To some, it may be a small price to pay for stability and financial certainty, especially if you are unsure how your career will look like in the short-to-medium term. In other words, this option may be more suited for the job-hopping millennials (hey, no shame), or those of you who simply prioritize greater career mobility.
However, do note that fixed interest rate packages are generally not available for properties that are still under construction or have not yet been built — what is commonly known as Building-Under-Construction (BUC) properties.
As any home loan for BUC properties will be disbursed (i.e. paid out) progressively according to each stage of the property construction, and the property itself will take several years to be fully constructed, banks appear to be disinclined to offer fixed interest rate packages due to the greater uncertainty involved with BUC properties.
So if you’re looking to purchase that new private/executive condominium which will only be ready in a few years’ time, you will only have the option of floating interest rate packages.
Usually, it is only after you have obtained the keys to your newly completed property (i.e. once the Temporary Occupation Permit (or TOP) has been issued), that you will be able to reprice/refinance your home loan to a fixed interest rate package.
Floating interest rate home loans are loans which have their interest rates pegged to certain benchmark rates that fluctuate depending on market conditions.
To add a little imagery to this, imagine a rubber toy boat “floating” in a tub of water, and think of the boat as representing the interest rate, and the surrounding water as the benchmark rate it is pegged to. The boat rises along with any rise in the water level of the tub, and lowers with any corresponding decrease — and so it is with the floating interest rate. As its name suggests, it quite literally “floats” along with whichever benchmark rate it is pegged to.
Other than being pegged to a certain benchmark rate, the floating interest rate also comprises what is known as a “spread” — which is essentially what the bank charges over and above the benchmark rate. Thus, it is customary to see the floating interest rate expressed in the following formula: “[BENCHMARK RATE X] + 0.25%”, for instance, with “0.25%” being the “spread” that could differ from year to year.
As would be obvious, floating interest rate packages are favorable in low-interest-rate environments. However, because such savings can be eroded if you do not spot an uptrend before it happens, floating rates do not offer the stability and financial certainty that fixed rates do.
To make sure the floating rate is still working favorably for you, you would have to put in that extra effort of better understanding the trends of the home loan market and be willing to keep an occasional eye on the benchmark rates as and when they fluctuate.
The three common types of benchmark rates available on the market are SIBOR, fixed deposit rates, and the respective banks’ internal mortgage board rates. We get into the deets below.
The majority of banks in Singapore offer a floating interest rate package that is pegged to the Singapore Interbank Offered Rates (SIBOR). Put simply, SIBOR is basically the interest rate at which banks in Singapore lend money to each other, and is administered by the Association of Banks in Singapore. SIBOR, therefore, reflects the cost for banks to borrow funds from one another and is compiled and determined on a daily basis. Its current and historical rates are easily and widely available online.
As pointed out earlier, the spread the bank charges may differ from year to year. However, what is more, important to look out for is the frequency at which the SIBOR rate will be adjusted/reviewed — and this is indicated by the number of months listed right upfront (e.g. 6M = 6 months / 3M = 3 months / 1M = 1 month).
In a nutshell, choosing the appropriate adjustment frequency boils down to your appetite for risk and the trend of the SIBOR rate. If SIBOR rates are falling, choosing a shorter adjustment period (e.g. 1M SIBOR) would pay off, since the eventual interest rate would be more accurately pegged to the prevailing (falling) SIBOR rate from month to month. However, if SIBOR rates are rising, the converse is true and a 3M SIBOR or 6M SIBOR would better “cushion” against any increase in the SIBOR rates with the lower rates of previous months.
Of all the benchmark rates available in the market, SIBOR rates (both current and historical) are by far the most transparent, and thus easiest to monitor and track.
Interest rates that are pegged to a bank’s fixed deposit rates are also fairly prevalent. Some examples include DBS’s Fixed Deposit Home Rate (FHR8), or OCBC’s 15M Fixed Deposit Mortgage Rate (15M FDMR), and they are typically pegged to the prevailing interest rate for timed fixed deposits of a certain amount. For instance, FHR8 refers to the prevailing 8 months Singapore dollar fixed deposit interest rate of DBS Bank for amounts within $1,000 to $9,999.
Depending on whether there is a lock-in period to the home loan, the spread may differ (usually higher if no lock-in period).
As compared to SIBOR, fixed deposit rates of the various banks are not as transparent. While some banks (e.g. DBS, OCBC) do publish a list of their latest fixed deposit rates and will inform you in advance of any impending increase, historical rates or trends are not as accessible even online. Thus, there is the little scope and ability to really track or monitor these rates.
Internal mortgage board floating rates are bank-managed rates that are fully determined by the bank. Apart from typically giving you 30 days’ notice of any revisions (read: increases) to the interest rate, the bank can pretty much do anything it wants with the rate, without having to explain or justify anything to you.
Given the lack of any transparency to these rates, pegging your home loan interest rate to the bank’s internal mortgage board rate would require a good deal of courage and trust in the bank. Should you settle for this option, do yourself a favor and make sure you minimize any lock-in periods and other refinancing/repricing costs to enable you to jump ship if the circumstances call for it.
Whether a fixed or floating interest rate package better suits you ultimately depends on the type of person you are. Generally speaking, you would need to be a little bit savvier and be willing to get your hands a little dirty if you want to reap the savings that a floating rate might offer. Otherwise, stay clean and enjoy the stability and certainty that a fixed rate promises.
Regardless, it is always prudent to make sure that your hands are not tied down for more than is necessary when it comes to choosing any home loan package. By all means, weigh the options available, but always be on the lookout for the package which imposes the least refinancing/repricing costs, and allows you the most flexibility — whether it be shorter lock-in periods or multiple options for free conversion/repricing of your home loan.
This article was first published on GoBear Singapore blog.
