NOTE : If Sibor stays low, the fixed rate package monthly
repayment will be nearly $100 more per month.However, if Sibor
returns to historical highs, it will be nearly $700 more per month
for the floating
package.
Home Loan Weigh Your
options
Fixed or floating rate ? Locked in for how
long ? Better to think long-term
Property Is never far from the minds of Singaporeans. And why
not ? We all want four wall to call our own. But bricks and
mortar can be a minefield - especially when it comes to loans.
A mortgage is a huge commitment, it goes without
saying, and the temptation with interest rates so low is to borrow
big and go for a posher home. What could go wrong?
Well, the obvious hitch is that rates, which
are at rock-bottom levels, can and must go up. That means an
affordable mortgage could fast become a millstone around your
neck.
Says DBS Bank's head of deposits and secured
lending, Ms Lui Su Kian : "Home owners should understand how rising
interest rates will impact their repayments."
That means a borrower needs a stable income,
and knows down to the last cent what his or her monthly cash-flow
and other outstanding liabilities are.
Ms Chia Siew Cheng, United Overseas Bank's
(UOB) head of loans division, notes: "One important factor that
home buyers should consider when purchasing a home is their ability
to repay the loan over the long term.”
Banks play their part by reining in the
over-enthusiastic and trying to restrict loans to viable levels.
Yet , there is still a myriad of offers out there for borrower to
consider.
With so much choice, making that crucial
decision can be difficult. The Sunday Times examines some of the
options.
1 Fixed or floating: which Is
better?
A fixed rate package means the interest rate is set
for a period of one to three years usually. The actual rate varies
across lenders.
Typically, rates for fixed packages are higher than those
for floating ones, as you pay a premium for having certainty about
your payments, which are fixed even if interest rates rise.
A survey of six banks shows that fixed rates range
from 1.18 per cent to 1.38 per cent in the first year for a
two-year lock-in period.
Floating mortgages have the interest rate pegged to
an index, which may fluctuate from time to time, causing your
repayments to rise or fall in tandem.
Floating mortgages are usually pegged to the
Slngapore lnterbank Offer Rate (Sibor), the Swap Offer Rate (SOR)
or the CPF Ordinary Account interest rate, and the board rates of
each bank.
Sibor is the rate at which finandal institutions
lend unsecured funds to each other, while the SOR is based on a
formula that takes into account the current and expected exchange
rates of the US dollar against the Singdollar and the local
interbank lending rates for the greenback.
Both of these rates are published daily in The
Business Times.
Sibor and SOR have been hovering at near-historical
lows over the past six months, making floating rate packages
extremely attractive.
Banks tack a bit on to whatever benchmark they use.
It Is called the spread and represents their slice of the deal.
The average spread being offered for a three-month
Sibor-pegged loan ranges from 0.75 per cent to 0.9 per cent.
Based on Friday 's three-month Sibor of 0.4 per
cent, the interest rate would be 1.15 to 1.3 per cent,lower than
fixed rates.
The downside to floating rate packages is that
those benchmarks can rise. Sibor hit 2.23 per cent in September
2008, its highest level in three years. That would have put
mortgage rates at more than 3 per cent.
There is no cap to how high Sibor can go, but
economists seem agreed that it will stay low for the next two
years.
Banks are also at liberty to vary the spread.
OCBC economist Selena Ling says short-term
Singdollar interest rates "look fairly well anchored, especially
since the US Federal Reserve has committed to keeping exceptionally
low Interest rates tlll late 2014"·
Ms Ling expects the three-month Sibor at the
end of the year to be 0.45 per cent, a slight uptick from the
current levels of close to 0.4 per cent.
On the other hand, HSBC Global Research
forecasts that the three-month Sibor will stay at 0.4 per cent
until the last quarter of the next year.
Mr Alvin Llew, senior economist at UOB, believes
the United States Federal Reserve may be forced to increase
interest rates in the third quarter of 2014, given the possibility
that inflation expectations will rise significantly that year.
"If US rates start to climb, Singapore interest rate will
also start to move higher," he said.
The CPF Ordinary Account Interest rate is derived
from the rates of the local banks and is reviewed every three
months. From November to January, the rate was 0.16 per cent.
However, as legislated by the CPF Act, the minimum interest rate is
2.5 per cent.
Board rates differ across the banks. It is unclear how
these rates are derived and they are not easily available.
This may mean a great deal of uncertainty as to how your
monthly repayments will change. Since 2006, there has been a push
for greater certainty, and banks are offering fewer of these
packages linked to board rates.
The Sibor is the rate at which banks lend to each
other, so the one-month Sibor is the interest rate for borrowing
money for a month.
Correspondingly, the three-month and 12-month Sibor
are the interest rates for loans for three months and a year
respectively.
Given that lending money for longer periods of time
entails slightly more risk than a shorter-term loan, the one-month
Sibor is generally lower than the three-month Sibor, which is in
turn lower than the 12-month Sibor.
The 12-month Sibor ls equivalent to a one-year
fixed rate, and should be considered if you expect Sibor to take a
sharp upswing in the second half of the year.
However, if you expect interest rates to remain
fairly level and do not mind having minor adjustments to your
monthly repayments, the one-month Sibor maybe suitable to your
needs.
Some banks do offer packages where you are allowed
to switch between the three rates.
Financial advisers say that in the current economic
Situation, most of their clients are fearful of interest rates
going up.
However, Mr Derrick Ang, director of mortgage sales
at consultancy portal SingaporeHousing Loan.sg; says: "With the
fact that interest rates are at their lowest, the only way to go is
up."
He added that which package clients eventually
choose depends on what the customer think of the current low
interest rate trends.
lf they think interest rates will continue to stay
low, it may be better to go for a floating package.
2) Lock-in
Periods
The lock-in
period refers to a pre-determined number of years during which the
borrower has to pay a penalty 1f he changes the terms of the
contract, either by cancellation, prepayment or conversion.
Most fixed-rate packages come with a lock-in
period, but floating rate packages can give the option of having no
lock-in.
A lock-in period can last for as long as two years,
so ask your bank if such a package has a better interest rate than
one with no lock-in.
If you are buying a property for investment and may
sell the property within a short time period, it may be better to
take the package without a lock-in period, since you will not incur
any penalties. Those penalties range from 0.75 to 1.5 per cent of
the loan.
3) Freebies that banks offer with their
loan packages
The standard offering across banks would be:
1. Legal fee subsidy, of up to $2,500 at some banks.
Others absorb the legal fees completely, but only
if you go to certain law firms.
2. Fire insurance for the first year at private homes and HDB
developments.
3. Valuation subsidies should also be part of the deal.
Even if your package does not come with a lock-in period,
there is an average claw-back period of three years for these
freebies, which means the bank will make you pay them back.
Banks occasionally do throw in other perks, such as
furniture or shopping vouchers, to sweeten the deal. If your banker
ls not offering you anything, it does not hurt to ask.
4) Loan for HDB
flats
When you buy a Housing Board flat, you can borrow
from the HDB or a bank.
When Sibor and SOR were at highs of more than 2 per
cent in 2008, the HDB, which pegs its loans to the CPF Ordinary
Account interest rate set at a minimum of 2.5 per cent, was
considered more attractive.
The interest rate for an HDB mortgage now is 2.5
per cent plus 0.1 per cent, so it is 2.6 per cent.
In these days of a low interest rate environment,
it may be better to go with a bank loan.
However, the loan quantum for a bank loan on HDB
development is capped at 80 per cent of the property price, but an
HDB loan can go to 90 per cent.
You will also need to cough up more cash upfront if
you take a bank loan instead of an HDB one.
HDB loan quantums are about $250,000, which is
significantly less than those of private properties, so the
interest rate differential may be less significant.
5) Developer tie-ups a win-win
?
In the past, banks could offer interest rate absorption
until the project was completed, which certainly sweetened the
deal. but this is no longer allowed by the Monetary Authority Of
Singapore.
There are now few exclusive tie-ups between banks and
developers, and at showflats, there will usually be more than one
bank.
The rates offered by the banks present will certainly be
competitive, but shop around in case something better is
available.
6) Relationship with bank may get you a
better deal
Most banks do reward customer loyalty and take your
relationship with them into account when making a mortgage
offer.
For example, customers who have substantial assets under
management by a bank, and perhaps a business relationship as well,
maybe offered a customised package with lower interest rates than
those publicised.
Invest - Page 33-34 The Sunday Times March 25, 2012
