You don’t have to feel embarrassed for knowing close to nothing about what are the best interest rates, what is the current SIBOR, or what types of mortgage structures are available. Buying a house is not something we do every week like visiting the supermarket. For something that the average person does only a few times in a lifetime, you can excuse yourself for not knowing enough about Singapore home loans.
Let’s say you have got your in-principle approval out of the way. You have bought you property and assuming the approval for your requested loan-to-value or quantum of funds is not an issue, you will now have the luxury of picking any dish on the mortgage buffet table, and have bankers serve you to your doorsteps as well. Hopefully this will provide a good overall picture of the menu available to you so that you can have a rough idea which ones to choose between.
This is not an endorsement or criticism of any type of loans.
In other parts of the world, this can also be described as an adjustable rate. It is basically a home loan with an interest that consist of an index rate plus a spread. The most common index used for these packages are SIBOR and SOR. It must be mentioned that as long as the monthly interest is constantly fluctuating, it can be described as a floating rate. Take note that SOR used to be offered by a number of lenders. But since the SOR crash of 2011, only 1 remaining bank is offering housing loans pegged to it.
These are the type of mortgages with interest that are literally fixed at a specific number. But you are not going to get a 30 year fixed rate in Singapore. It will be set for a number of initial years, usually between 2 to 5, and revert to a floating to a variable rate. Forget about the 25-year fixed rates you read about on the internet. Those are not available in Singapore. Even HDB loans are pegged to CPF rates which are not actually fixed.
Loans that are pegged to an index rate internally determined by the bank are variable rate loans. It is like a floating package in that the rate a borrower pays is dependent on the index. But in this case, the index being used is one that has it’s figure determined by the lender. And like a fixed rate mortgage, you could also be on a variable interest in the initial few years and be converted to a floating structure as well. There are many varying names used to describe these internal indexes. Prime, board, benchmark, etc. If a lender decides to adjust their index higher or lower, you will either gain or lose accordingly.
Hybrid structures are loans that are divided into portions. And the different portions will have different interest structures. For example 50% of it will be on a fixed rate, while the other half is floating. They are theoretically different loans. So you can redeem a portion without having the other portion affected in any way. It can be useful if you are making a full or partial redemption where you will redeem the portion which has no prepayment penalties or lock-in period.
More flexible choices
As you can see, there are 4 basic fundamental structures of how mortgages are configured in Singapore. If you have already done your shopping, all the packages sent to you by the bankers probably fall under one of these 4 types.
Other than having a choice of the type of loan that attracts you most, you will also have more features to take advantage of with some lenders. Here are some of them.
Since we are currently in an unprecedented period of extraordinarily low interest environment, there could be a huge element of hikes that property buyers fear. To put these fears to sleep, some banks offer an interest ceiling that applies to their loan for a specified period of time. For example, a ceiling of 2% for 6 years. This means that no matter how high an index that your loan is pegged to rises, the maximum that you will pay is 2% for the first 6 years. Very useful feature.
If you are not aware, there are many terms associated with SIBOR and SOR. 1 month, 3 month, 6 month, 12 month, just to name a few. The shorter the term, the lower the index tend to be. Why? Surely expect a 12 month fixed deposit to have a higher rate compared to a 1 month deposit, correct?
The main factor that differentiates index terms (other than the obvious differences in percentages) is the refresh period. The refresh period is the period of time to go through before the new current index percentage is used. For example if 3 month SIBOR was 0.5% 3 months ago and 1% now, you will be paying 0.5% for the 3 months till now, and 1% for the next 3 months. That is how a 3 month refresh theoretically works. We have left out the spread in the example for easier understanding. In theory, a 1 month SIBOR will refresh every 1 month, 3 month SIBOR will refresh every 3 month, and so on. But a lender has the power to determine it’s own terms. They could offer something like a 1 month SIBOR at a 3 month refresh. So remember to check out these details before signing up any contracts.
Some lenders may offer you a feature that allows you to switch between the different SIBORs as and when you like to, with a notice period of course.
Why would you want to switch?
Because if there is a sudden surge of indexes, a monthly refresh will leave you exposed. In the same line of though, if interest rates are falling like flies, being on a high 12 month SIBOR will not allow you to exploit them.
In case your are really indecisive and circumstances forced you to accept a loan you are not very clear about, a conversion feature will help ease your mind. Such a feature allows you the option to totally change the type of mortgage you are on to a different one. For example, changing from a floating package to a fixed package. It provides you the option and freedom to make these decisions when you realised that you have made the wrong initial choice. Do take note that this replacement action usually come with a time frame where it is executable. And what is available to you depends on what is being offered by the lender at the point of exercising this clause.
This can be a very attractive feature for those who have more cash on hand than they prefer. Sounds weird isn’t it. But there are many people out there who are leaving their cash in deposits without putting them into inflation-beating investments that generate a good return. Why not use those funds to offset the mortgage interest?
This feature basically requires you to deposit funds into an account. And as long as you lease those funds in there, a portion of your outstanding loan will have it’s interest reduced. The actual figure depends on the terms from bank to bank.
There can only be benefits associated with being a privileged customer of a bank. In this case, the benefit is better terms than the general public. A bank might offer you a 2% mortgage but reduce that to 1.5% if you become a priority banking client. Not too shabby.
To become such a client, you will often have to deposit or invest a certain amount of funds with them for at least a specific period of time. So if you have nothing better to do with your funds, you can have an expert manage it for you and enjoy privileged rates on your home loan as well.
Making your choice
It is important to note that you are taking on a long term financial commitment. Because of this, the type of loan package you choose must be one that you are most comfortable with. And at the same time, remind yourself that all lenders are essentially selling you the same product, which is money. It’s just that they package it differently. Do contact us if you want an opinion.
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