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How To Select Home Loan – Interest Rate

Interest Rate

There are 11 major banks and 2 finance companies in Singapore that provide home loans to customers.  It will certainly be a frustrating experience trying to call all of them and then figure out which one is the best for you especially when they come with different features besides pricing.  What are some important factors to consider when one selects a mortgage?

Broadly-speaking there are 5 areas to look at and in a five-part series we like to cover them one by one starting with this article which explores the number one factor for most people – interest rate.

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Before we start let us first summarize the 5 factors of considerations in choosing a home loan.  They are :

  1. Interest Rate
  2. Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
  3. Special Features (eg. interest offset account, switching between sibor periods etc)?
  4. Personal Considerations
  5. Tenure and Loan-to-Value (LTV)

Let’s begin.  As we have said earlier by and large interest rate is the single most important factor customers will look at when choosing a home loan.  And when it comes to interest rate you have to further look into how it is structured and there are a few aspects which will be spelt out clearly in the loan offer document.

a)      Promotional rate VS Long-term rate

Typically the bank will offer a lower spread (eg. +0.85% to +1.0%) hence a lower rate in the first three years of the loan, sometimes even up to first five years for sizeable loans.  After this “promotional period” most banks will then revert the spread back to a higher “long-term” rate (typically +1.25%) which then applies throughout the rest of the remaining tenure.  However there are 2 banks in the market that buck this trend and offer to hold this “promotional” rate all through to the end of the loan tenure.  That is certainly a big factor to weigh in your deliberation as it effectively saves you the trouble of having to refinance after the end of each promotional rate period or every 3 years.

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b)      Floating rate VS Fixed rate

Next you also have to look the pros and cons between going for a floating rate package as opposed to a fixed rate.  Most banks are not very keen to do a fixed rate lock-in at the moment with rates expected to rise over the next few years as the global economy recovers.  Frankly this is more of an art than science – to try and determine when rates will eventually rise and how fast that will be.  The debate goes on at every level and even within US Fed’s FOMC meetings.  There is no right or wrong answer and a lot depends on your own outlook on interest rate.  Follow our blog post here as we bring you the latest scoops.

It may be worth mentioning that at present moment the gap between the lowest fixed rate package at 1.48%p.a. and the best floating rate packages at around 1.2%p.a. is only 30 basis points which will not make too much of a difference to your monthly instalment.  For example on a typical $800,000 outstanding housing loan balance for refinancing over a period of say 20 years, the difference between the 2 instalments of $3860-$3750 works out to only $110 per month or around 3% more.  Hence it may be worth switching to a fixed rate loan for the next 3 years for that peace of mind.

c)      Market-pegged VS Board-pegged

How about which benchmark to peg your loan interest on?  In Singapore, most banks offer only 2 benchmarks – money market indices (usually 3-month sibor or sor) or the bank’s own internal board rate for residential property.  Usually the bank adds a markup as their profit, also known as a spread, over this 3-month sibor, or likewise subtracts a margin from its board rate, which then forms the final rate. Over the last 5 years, most customers prefer a more transparent benchmark like 3-month sibor rather than board rates which is subject to the idiosyncrasies of the bank.  Albeit most bankers will tell you their board rate has proven to be stable and has not moved an inch in the last 5 years.  Still that was only in the last 5 years since 2008 where rates were generally ultra-low.  There is a perception in the market that banks will be slow to reduce their board rate but quick to adjust upwards when money market rates start to move.

DBS has recently introduced a new and first-of-its-kind peg called the FHR – Fixed Deposit Home Rate.  The bank defines this as the average of the bank’s published 12-month and 24-month Singapore dollar time deposits rate which currently hovers at around 0.40% similar to your 3-month sibor rate.  So far the market seems to have received the FHR quite well going by early results on DBS home loan books.  Here at MortgageWise, we think FHR may be more stable and any future increases in FHR will lag behind SIOBR and SOR for the simple reason that fixed deposit rates form the cost of funds to the bank especially for DBS with a huge deposit base they will be slow to increase their cost of funds.

Watch this space for the next few write-ups on what else to consider in choosing the best loan package for yourself.

Alternatively, consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.

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