board rate or sibor rate

They Say Board Has Not Moved In Past 6 Years But It Just Did!

At MortgageWise we have not recommended mortgages pegged to bank’s internal Board rate for  home loans since last year.  Even though we have repeatedly heard what our clients said of how bankers market to them Board packages – the bank has not moved the Board in the last 6 years since 2009!

Why so?  Because we do not believe that statement holds true going forward.  You see, there was no reason for the bank to move the Board rate in the last 6 years when sibor was at historical lows of 0.40% range – move it up and there will be backlash from existing customers when sibor is not moving, adjust it down and they would have cut their own interest margin.  No bank will do that.  Hence there you go – “Board has not moved in the last 6 years” they will tell you.  However things will be different when sibor started to trend up since last October.

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The local banks have moved their board rate up in the last few months, in fact one just up by a whopping 60 basis points from 4.5% p.a. to 5.1% p.a.!  To be fair although that might seem a lot in one fell swoop, but is that not the same magnitude of how much sibor has moved up to from 0.40 to almost 1.0 % now?  Essentially the bank is maintaining the same interest spreads or margins.  Fair game.  In fact I would argue there is something like a 3-month lapse for Board to level up only after sibor first moved.

On that basis it seems logical that between Board and interbank rates like sibor, in an environment where interest rate is trending up, the former is a better option as your interest gets “priced somewhat later” if you are on Board, albeit that may not always be true for all banks.  Every bank will have its own idiosyncratic objectives when it comes to treasury spreads and pricing.  However what is certain is that when the cycle next turns to bust and interest starts to dwindle, the Board will always lag behind sibor due to bank’s profit interest to try and maintain the spreads for as long as they can.  So switch back to sibor-pegged loans when the time comes.

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For now we do recommend the first choice is to go for fixed rate home loan and for the longest fixed period possible.  However as fixed rate beyond 3 years are all above 2% p.a., the temptation is there for one to take a bet on floating rate mortgages at average 1.5 t0 1.6% pa. over a 3-year period.   This is especially so for those who have plans to pay down the loan in full or a big portion of it should interest shoot up beyond the tolerable levels of 2.5 – 3% p.a.  After all some of you may not be aware, when interest goes to 3%, more than 50% of what you pay every month will go to the bank’s coffer as interest for the first 10 years of the loan, instead of going towards reducing your loan outstanding.  See the example below using our very own mortgage calculator based on a typical loan size of $750,000 over 30 years where the bars in yellow depicts the interest component out of the total paid to the bank each year.

interest vs principle reduced for a mortgage loan

If you are one of those who wish to take a bet on floating rate home loans, the Board based packages might be slightly better than sibor in the next few years but caveat emptor – every bank’s behavior is different when it comes to how fast and how much is the adjustment in Board.  More crucially do not lock yourself in for board based packages especially if you have plans to pay down the loan in full should interest shoot up too quickly in the next few years.  However most board packages that are attractively-priced seem to come with some lock-in.  Then go for a shorter lock-in at the very least.

At MortgageWise, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner in Singapore when you buy your next property. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with successful careers in banking & real estate before becoming an entrepreneur.
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