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Understand Different Types Of Home Loan Interest Rates In Singapore

April 3, 2017
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Getting a home loan can be a pretty confusing with bankers throwing around financial jargon that can easily throw off most people. Today we at Easyrates will try to explain the different types of home loan interest rates and some of the common misunderstandings people have about them, so that you can better understand what you may be getting yourself into.

 

Fixed Rates

Fixed rates are perhaps the most commonly sought after and easily understood type of home loan interest rate. Basically the bank guarantees you a fixed interest rate for a set period of time, once this period of time is over, your interest rate changes from a fixed rate to a floating rate commonly based on SIBOR / SOR rates – that we’ll explain later.

Common misunderstandings about Fixed Rates

  1. Once I get a fixed rate bank loan, my interest will be fixed throughout the loan tenure.
    This is a fairly common misconception. Unlike HDB loans fixed rate bank loans are only fixed for a specific period of time – typically 1 – 3 years –  after which they become floating rate loans.

  

SIBOR/ SOR Rates

Perhaps the most common type of home loan rate available in Singapore. SIBOR/ SOR based home loan interest rates take a SIBOR/ SOR rate with a predetermined spread added in. These rates fluctuate on an almost daily basis and can move rather quickly upwards or downwards.

An example of how a SIBOR / SOR based home loan package is calculated:

A bank may quote you an interest rate of 3 Month SIBOR + 0.5% for the first 3 years.

Assuming the first years 3 Month Sibor rate is 1%, the second years is 1.5% and the 3rd years is 1.4%, the interest you’d pay is 1.5% on the first year, 2% on the second year and 1.9% on the third year.

 

What is SIBOR and SOR?

SIBOR is the Singapore Interbank Offer Rate and is the benchmark rate that banks use to borrow and lend money to each other

SOR is the Swap Offer Rate, think of SOR as the interest rate you would pay if you borrowed the same amount of money only you borrowed it in US dollars first and then converted it to Sing dollars. The SOR rate is largely impacted by US dollar movements, for example, if the US dollar strengthens from 1.39 SGD/ 1 USD to 1.41 SGD / 1 USD, the SOR rate would also increase.

 

Common misunderstandings about SIBOR/ SOR Rates

  1. SIBOR Rates are set by MAS so they can never go too high
    SIBOR rates are not set by MAS but rather by the Association of Banks in Singapore, which takes data from banks about their borrowing and lending to other banks and then set the rates based on this data. MAS is not involved in the process of setting SIBOR Rates.

 

  1. There is only one type of SIBOR/ SOR rate
    There are actually 4 different types of SIBOR rates (1 month, 3 month, six month and 12 month) and 4 types of SOR rates  (Overnight, 1 month, 3 month and six month). The interest rate you end up paying can vary based on the type of SIBOR/ SOR rate, for example the six month Sibor Rate is 1.247% as of time of writing while the 1 month rate is at 0.74833% as of time of writing.

 

Fixed Deposit Rates

Over the past few years Fixed Deposit Based Home Loan rates have been increasingly gaining popularity. A fixed deposit rate based home loan is when the bank charges you the fixed deposit interest rate + a spread on your home loan.

This has been gaining popularity as they tend to be one of the more stable options. Though there is no guarantee that Fixed Deposit Rates will not shift, there are quite a few banks where these rates have stayed static for 4 – 5 years. Another reason why Fixed Deposit Based Home Loan Rates have proven popular is that in order for banks to increase their Fixed Deposit Rates, they would have to increase the amount of interest they pay to their customers as well.

An example of this would be when Bank A sells you a home loan package based on their 48 month fixed deposit (Under $20,000) rate + a spread of 0.70%.

Assuming the first years 3 Month 48 month fixed deposit (Under $20,000) rate is 1%, the second years is 1% and the 3rd years is 1.2%, the interest you’d pay is 1.7% on the first year, 1.7% on the second year and 1.9% on the third year.

Common misunderstandings about Fixed Deposit Based home loan Rates

  1. Fixed Deposit Rates are Fixed rates
    Fixed Deposit Rates are not Fixed Rates and can fluctuate depending on what rates the banks decide to offer its fixed deposit customers.
  2. Fixed Deposit Rates will always remain low
    Though it is generally true that fixed deposit rates are and for the most part have remained low, there are also outliers that have increased their fixed deposit rates to as high as 3+% at one point.

 

Board Rates

Board Rate based home loan packages are less common these days, so don’t expect to see too many of these in the market. Board Rate based home loan packages are basically home loan packages where the interest is based on a board rate less a predetermined spread. For example Board Rate – 0.7%.

So Why Are Board Rates Unpopular? Getting a Board Rate based home loan is pretty risky, as Board Rates are internally set interest rates. Which is to say that the bank that provides the loan sets the Board Rate by itself without any external control or oversight, making this one of the most risky types of rates available.

 

We hope that this article has helped you understand a little bit more about the different type of home loan interest rates available in the market. Like what we wrote? Share us on Facebook! Feel  we left out some useful information? Drop us a comment below! Need help with rates? Drop us an email at hello@easyrates.sg and we’ll be more than happy to help you!

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Wayne Quek

Wayne is a Chartered Financial Analyst (CFA), and holds a Bachelor of Business Management (Finance) from Singapore Management University (SMU). A successful Relationship Manager during his time with DBS and HSBC, Wayne used his expertise in financial markets to help his clients build up comprehensive investment portfolios. The entrepreneur is also the founder of Home Loan Whiz, a mortgage consulting firm that assists clients with selecting ideal mortgages for their needs.

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