Definition
Index Rate
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An index rate refers the the rate of an index that a housing loan is pegged against.
All mortgages in Singapore consist of interest rates that are pegged to index rates.
This is so that banks will never be making a loss from the loans they underwrite.
Because should the cost of credit rise above the interest on home loans, lenders can easily adjust the interest rates upwards by adjusting the index rate.
Either that, or market forces will drag index rates upwards along with it.
Even fixed rate loans will eventually be priced at index plus spread when the initial period of fixed rate starts to float.
The index used for HDB home loans are CPF rates.
The common indexes used by banks include:
Take note that various indexes are internally set by lenders and are just internal board rates by different names.
While indexes like SIBOR and SOR are more transparent in that they are determined by market forces that no single lender will have total control over, internal board rates are solely set by lenders.
It is up to them to determine and decide what their boards rates will be.
It’s almost as if banks will have the power to decide how much profits they want to make from borrowers.
This means that should you have choice of which index to choose for your housing loan, do consider which index is the most transparent instead of just focusing on the price it is at at the moment of signing up.
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