Definition
Initial Interest Rate
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Initial interest rate is an industry jargon used by mortgage professionals.
It refers to the interest rates on housing loan before it reverts to a “thereafter” rate.
For example, if a home loan is structured by:
Year 1, SIBOR + 0.75%
Thereafter, SIBOR + 1%
The initial interest rate is SIBOR + 0.75%.
If it has:
Year 1, Fixed 1.5%
Year 2, Fixed 1.5%
Thereafter, SIBOR + 1.25%
The initial interest rate is fixed 1.5%.
Initial interest rate are often much lower than what is charged thereafter so that home buyers find the loans attractive enough to consider.
For this reason, they are also sometimes known as teaser rates.
One of it’s selling points is that even if borrowers find the thereafter rates high, they can still take up the loan to take advantage of the low rates and refinance the mortgage when they enter the period of thereafter rates.
However be mindful not to be swayed by gimmicks and pay attention to the interest that you will actually pay.
The initial rate period is the period of time when the initial interest rate is active. This period is also commonly (but not always) accompanied by a lock-in period where the borrower would incur penalty charges for redemption.
It should also be noted that even though an initial interest rate can be extremely low, it is not used to calculate TDSR for stress test when evaluating the loan amount that a borrower can be approved for.
The interest rate for this purpose is set as 3.50% for residential property and 4.50% for non-residential property by MAS.
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