DollarsAndSense tackles the diificult question that has been on the minds of many people over the past month. How rising SIBOR rates will affect homeowners, and why you may not want to rush to do any refinancing just yet.
What is SIBOR?
The Singapore Interbank Bid-Offer Rate, better known as SIBOR, are the rates at which banks lend unsecured funds to other banks in Singapore. Many home loan mortgages are pegged to the SIBOR. Thus if you do have an existing home loan taken with a bank, the SIBOR rates does affect you, one way or another.
How is SIBOR determined?
Despite being an interest rate that affects a large majority of people in Singapore, SIBOR rates are determined in an extremely straightforward manner. There are a total of 20 participating banks that submit their interest rate on a daily basis on how much they are willing to lend and borrow from one another. The results are ranked, and the middle 6 rates are taken and average out to give the SIBOR rate. Primary school maths. Maybe even too easy for a PSLE question.
Why is SIBOR shooting up?
Home-owners who have been following the news lately would have already expected interest rates to inch up following the federal Reserve’s decision to taper its bond buying programme last year, and, more recently, the strengthening of the USD currency against the SGD. This has caused the relatively stable SIBOR to shoot up by nearly 100% from close to 0.4% to over 0.89, as at 9 April 2015.
Fortunately, the Singapore government has previously been limiting the ability of home-owners to take on mortgages with the implementation of the Total Debt Servicing Ratio (TDSR). Although not foolproof, this will limit home-owners’ ability to take on risky mortgages that they are unable to service should interest rates go up.
How will the rising SIBOR rate affect you as a home-owner?
A rising SIBOR rate will equate to an increase of the interest payments of home-owners. Those most at risk are home-owners who have over-leveraged themselves and who are highly dependent on rent income to service their monthly loan repayment. Having been stung by government cooling measures that have lower the valuation of their property, they will now experience a double whammy with rents going down due to the tightening of the foreign workforce, and interest payments going up because of SIBOR.
Most analysts expect the SIBOR to end 2015 at the 1% mark.. Based on the increase in recent months, it is very likely that this expectation could be exceeded.
Repayment For A $700,000 25-Year Loan
|SIBOR||Spread||Total Interest||Monthly Repayment|
|3.0%||0.9%||3.9%||$3656 (+ $922)|
Assuming a home-owner took a $700,000 loan on a 25-year tenure at the start of 2014 when SIBOR rates were at 0.4%, his mortgage rate would be around 1.3%, and his repayment would be roughly $2,734. Assuming that SIBOR at the end of 2015 jumps to 1% as the analysts predict, his mortgage rate would be 1.9%, and his monthly repayment $2,933. This is about $200 more per month. No big deal?
If we further assume the SIBOR rate goes up to 3%, which has happened in 2006, his monthly repayment would then be roughly $3,656 at a mortgage rate of 3.9%, close to $1000 more per month.
 Note that you if you have an HDB loan, the cap on your HDB loan would be 2.6%.
What should I do now? Should I go for a fixed mortgage loan?
The most common question asked at this juncture would be “should I refinance my loan at a fixed rate so I don’t get any shocks?”
Let’s first explain a little about how fixed mortgage works.
The thing about a fixed mortgage loan is that it usually starts out low, at 1.5% in year 1 and increases gradually to about 3.75% in year 4 thereafter. There are fundamental reasons for that but we won’t go into the reasons today.
The main question to ask yourself is whether you think this is a better deal than going with the option of having your loan pegged to the SIBOR rate. In any case, refinancing your loan will cost you some administrative fees and the new rates you get quoted for the fixed rates will very likely not be the same as they were when you first bought your property and were considering your options before the SIBOR shot up.
Just by doing a little calculation, you would know that the SIBOR rate would have to be at 2.85% before the fixed rate starts becoming the better option for you. With analysts predicting that rates would rise to 1% this year, a sit-and-wait approach might be a prudent strategy for the time being.
The most important thing to take away from this episode is that we cannot control how interest rates will move. Thus, what we, as home-buyer will need to do instead is to control the type of mortgage we take, and ensure that we do not over extend ourselves to a point where slight changes in the SIBOR rate will greatly affect our situation.
How can I start planning?
You can visit websites with a home loan calculator to find the best options in the market that suits you. There are also online mortgage websites such as Wiseloans.sg and Moneysmart.sg that writes about the pros and cons of fixed vs floating interest rate. Even though some of the information in the website were written in 2014, the method of analysis continues to be relevant even in today’s context.
Do note however that the cheapest option is not always the best option in the long-run. Mortgage financing may appear straightforward but very often, there are more considerations to take note of than what most of us realized. A wrong decision can set you back substantially while causing unnecessary stress.
If required, you should speak to a trusted mortgage advisor to give you the best advice on whether any refinancing is required. And no, we are not referring to just any other mortgage salesman you see at new condominium launch. Drop us an email if you want us to link you up with someone trustworthy.
Different people have different needs in life, and this applies to your mortgage loan – take a long-term view to your mortgage loan instead of being swayed by short-term swings in the market, afterall, your mortgage runs for 20 to 30 years.