Which Is The Best Home Loan Package & Why Refinance Now?
Congratulations! So you have finally purchased and made that big decision of getting the home that you have been searching for. Now, you need to think about which home loan to choose and you want to make the best choice because you know that financials are important in determining in the long term how much profit or loss that you are going to make.
Bank or HDB loan , which is better?
HDB loans is only applicable for HDB purchases, be it a new or resale flat. The advantage of a HDB loan is that interest rates appear to be more stable. However, there are certain criterias to be met in order to qualify for a HDB loan, among them are having a Singapore citizen as an applicant, income ceiling of household not exceeding $12,000 for families and $6000 for singles.
You must not also own a private property before.
So then, what about bank loans?
Criteria to apply for a bank loan is you must be at least 21 years old and you must have a minimum annual income of $24,000. What is exciting about bank loans are that the interest rates can be very attractive and perhaps even lower interest rates compared to HDB loans.
However, do note that once you decide to take a bank loan, you cannot revert to take a HDB loan later on even if your bank loan rates go up.
Bank loan rates offered by banks, are also prone to fluctuations.
It is important to speak to your banker and ask these questions before signing on for a loan.
There are valid reasons for and against stretching your home loan. To decide on the tenure of your home loan, ask yourself this. Do you dislike having to pay over a long period of time with looming interest rates?
If that is the case, then go for a shorter credit term if you are able to do so financially.
However, a different school of thought for a longer loan tenure is to leverage on the current low interest rates and to invest the extra funds and generate returns that can offset the home loan interest you will pay.
The lower month to month payment also works better for individuals who would prefer not to be stretched in the short term. General rule of thumb is to attempt to get a loan of about 80% of the estimation of the property to guarantee you are not burdened with a huge monthly repayment.
Fixed or floating interest rate?
Firstly, decide if you wish to go with a fixed rate or floating interest rate.
Fixed rate means the bank guarantees you a fixed rate for a period of time. Floating rate means interest rates that change based on benchmark rates that they are tied to. Some fundamental research will assist you to ascertain if the Singapore housing rate is bound to rise or fall. Your banker would be able to provide some insights as well.
Be careful with floating rates that are not pegged to SIBOR or SOR. Banks can decide to raise the home interest rates that are pegged to the bank's internal board rates.
Lock-in period and charges
Legal fees for refinancing will cost about $1500-$3000. However, some banks will offer subsidies to offset these fees, either partially or fully.
There will also be valuation charges, which costs between $300 to $1500.
Focus on the lock-in period as well which are usually 2 to 3 years. Banks have a penalty for early settlement as well.
Refinancing or Repricing?
Refinancing is switching your mortgage loan from one bank to another.
Refinancing typically may involve higher costs, involving legal fees and costs of valuation. However, banks remain competitive today by offering packages to subsidise the legal and valuation fees (with clauses, of course) and potentially lower interest rates from your existing bank.
Repricing is switching your mortgage loan within the same bank.
Repricing is attractive as an option if the existing bank is able to provide an interest rate that is lower or similiar to other banks. This is because repricing also involves lesser charges, and lesser documents to submit for approval. There is usually a fixed admin or conversion fee of between $300 to $1000.
Monitor the interest rates after the lock-in period to see if there are any increases.
A good suggestion would be to renegotiate and compare every few years to continue enjoying the best rates.
SIBOR or SOR : Which should you choose?
The Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR) have always been the key reference rates for home loan packages in Singapore.
Banks often price your mortgage loans based on SIBOR rate (and sometimes on SOR).
By how banks borrow from each other, SIBOR is considered as a much more stable option. On the other hand, SOR, another interbank lending rate, is based on the exchange rate between the US dollar and the Singapore dollar.
Since the volatility index of the US market is higher, SOR is deemed to be more volatile. Given the market uncertainties, there have been periods when SIBOR was lower than SOR, and when SOR took over SIBOR.
To see how this works, let’s consider an example.
Although there are fixed rates available, most mortagage loans in Singapore are priced to a 3 month SIBOR. For example, a mortgage loan can be priced at 3-Month SIBOR + 0.7%, meaning banks will make 0.7% profit margin on the loan after paying 3-Month SIBOR to a lender. SIBOR or SOR based home loan packages in Singapore are typically structured to allow borrowers to determine what their interest payments will be until the end of the loan tenure.
Below is an example of a typical floating rate mortgage loan in Singapore.
Example Floating Rate SIBOR Package:
Year 1: 3 Month Sibor + 0.75%Year 2: 3 Month Sibor + 0.85%Year 3: 3 Month Sibor + 0.95%Year 4 (onwards): 3 Month Sibor + 1.25%
A floating rate loan could be a cheaper source of funding than a fixed rate loan. However, it exposes the borrower to the risk of rising interest rates, which will inflate the debt's cost over time. A fixed rate can reduce this uncertainty, though it comes with a higher interest rate than a comparable floating rate loan in exchange.
Most banks in Singapore offer mortgages based on SIBOR, although a limited few also offer SOR based loans.
Currently, choosing between SIBOR and SOR is a tradeoff between low rate and volatility. You may choose to go with SIBOR and pay a steady interest rate on your mortgage.
Or, you could go with a SOR rate to save on your interest in the short-term, though you take the risk of highly volatile interest rate that could increase more than SIBOR.
In Singapore, a floating-rate home loan can be packaged based upon the appropriate SIBOR or SOR rate, plus an extra amount which is called a spread.
This spread is determined by a number of factors, such as the size of the mortgage, the borrower's credit standing, the location of the property, etc.
The floating rates are reset periodically, usually every 1 to 3 months, to reflect changes to the prevailing rates.
Conclusion – which type of mortgage package should you choose?
Personally, floating rates seem preferable to fixed rates, at least for now.
I’m not saying that fixed rates are not viable. In fact, they are still good for their purpose, which is to protect against any further increments and give you peace of mind with fixed instalments for the next couple of years.
However, you will probably save more with a floating package. With the current gap, it will take a fair bit of increments for floating rates to overtake fixed rates.
This is especially true for SIBOR packages, as the spread is underpriced at the moment, mostly kept at 0.15% to 0.30%.
Unexpected rate changer in March: COVID-19 virus
Mortgage rates will continue to fluctuate based on developments in the fight against the novel coronavirus, COVID-19. In February, markets were watching the spread of the virus, with new cases being discovered in many countries outside China.
Malaysia has announced a national lockdown. We have yet to observe how this would impact Singapore. Mortgage rate watchers are justified in wondering how a virus could affect rates.The relationship is not exactly obvious.
Mortgage rates fall during times of economic uncertainty and lower expectations of inflation.
The coronavirus contributes to both. Globally, travel and transportation has been greatly reduced and impacted.
In mid-February, Apple, one of the world’s largest companies, announced it would miss revenue projections for the quarter. It blamed factory closings in China and a slower return to normal conditions than expected. Additionally, demand in China slowed, as people were hesitant to enter stores. The case of Apple is just one indicator of how a larger outbreak could slow the pace of the global economy.
Of course, no one wants a global health situation, but one unexpected outcome could be lower rates through March and perhaps beyond. Yes, you will expect fluctuations, but it is still a very decent proposition to consider.
To protect yourself, you can look out for packages with short lock-in periods, flexibility for prepayment and sale redemptions, and very importantly, free conversions to switch out to other indexes should things go south.
As described above, the outbreak poses risks to economic growth and lowers inflation concerns. While everyone hopes the virus can be contained, an unexpected spike in cases would keep rates low.
If you have been thinking about refinancing or looking for a suitable home loan, this month seems like a good time to take action.
Latest updates as of 31 March 2020:
Monetary Association of Singapore (MAS) and the financial sector of Singapore have rolled out a package of measures to ease individuals to apply to their banks and insurers to defer payment for their residential property loans.
Measures include allowing individuals to defer principal and interest payments on their property loans until Dec 31st 2020. Interest will accrue only on the deferred principal amount, and no interest will be charged on the deferred interest payments. Lenders will approve the request for deferment if the applicant is not in arrears for more than 90 days as of April 6, 2020.
Okay, what next?
Lets brace ourselves for these uncertain times, and be opportunistic with the available options that we currently have. Study the various bank rates available. With that in mind, I routinely advice my clients to refinance their property to enjoy the best market rates.
I have a panel of bankers and lawyers who I work with constantly and will be able to assist you. Feel free to contact me for a referral or further insights on this.
Until then, let us all stay safe and be brave to overcome this turbulent year together!
About the author
Marie is a realtor with OrangeTee & Tie and an aspiring property content writer. She loves connecting people with their dream homes, and derives satisfaction when her clients still happily reminisce about their house-hunting with her years later! Aside from her love of viewing gorgeous homes, she enjoys local fare and travelling.