TFN Editorial Team. 01 June 2016

All home loan packages can be broadly classified into two categories: fixed rate packages and floating rate packages. In this article, we will explain the different types of packages in order for you to have a better understanding and make a better decision for your next home loan.

Fixed Rate Packages

Fixed rate packages simply mean the rates are fixed at a set numeric value and will not fluctuate regardless of market conditions. However, despite it being called fixed rate packages, rates are only fixed for the first few years, after which it reverts to a floating rate.

Fixed rate packages offer you the interest rate certainty in that you know you would be paying this fixed amount of monthly instalment every month. The downside is that fixed rates tend to be higher than prevailing floating rates (because the banks need to build in a certain buffer) and they tend to come with lock-in period for the duration of the fixed rates.

Floating Rate Packages

Floating rate packages, on the other hand, track a certain benchmark rate and thus are subject to fluctuations. We will look at the main types of floating rate packages that are common in the market. Floating rate packages are based on the benchmark rate plus a margin, for example 1m Sibor + 1%.

Sibor-pegged floating packages

SIBOR stands for the Singapore Interbank Borrowing Offer Rate. This is an aggregated rate collated from the banks and represents the rate at which banks lend to one another.The SIBOR is published daily by the Association of Banks in Singapore.

Sibor comes with tenors of 1/3/6/12 months, and each has its own associated interest rate. For example, a 1 month Sibor rate of 0.75% means the cost to a bank for borrowing through the interbank market for a 1 month period is 0.75%.The period also refers to thefrequency of interestrate reset(i.e a 1m sibor pegged package will have its interest reviewed every month).The longer the term, the higher the interest, hence 12-month Sibor rate will be higher than 3-month Sibor rate.

Fixed Deposit-pegged floating packages

Introduced in the past year, such packages are pegged to the bank’s fixed deposit interest rate, typically the 18-month or 36-month fixed deposit rates. As fixed deposit rates typically do not fluctuate as often as Sibor and are also displayed publicly at banks, these type of packages offer more stability than typical Sibor-pegged packages, and are more transparent than banks' internal board rate packages

Internal Board rate-pegged floating packages

These type of package are pegged to the banks' internal board rate, which is typically not as transparent and the calculation method for them is not publicly disclosed. As it is not as popular compared to Sibor-pegged packages, some banks have stopped offering board rate packages totally.

Other features and clauses

The above covers all the popular types of packages in Singapore. Some banks have certain features to make their products look more attractive, while others have packages that comewith additional clauses tied to them. For example, some banks have packages where they throw in an interest-matching deposit account – basically the interest earned on the funds in the deposit account is used to offset your loan interest up to a certain limit. An example of a package with special clauses is where a bank requires you to take up mortgage insurance with them in order to enjoy a slightly lower interest, otherwise your interest will be slightly higher.

Other Considerations

As mentioned earlier, fixed rates offer the certainty of knowing how much your monthly instalments are at the cost of a slightly higher interest compared to floating rates. For borrowers who do not wish to bear any interest rate risk or believe that interest rates will go up, fixed rates will be preferred.

In short, you should consider fixed rate packages if you are:

- going to occupy your property and do not mind locking in your interest for the first 2 to 3 years of your loan to hedge against increase in interest rates

-businesses desiring certainty of instalments for easier budgeting and financial control

- risk averse and/or believe that rates will go up in the near future

Otherwise, you should consider floating rate packages if you:

- are buying a property for investment and may consider selling in the near future and will thus do not want a lock-in period(many floating packages have no lock-in periods)

- believe that interest rates will remain the same or go lower.

Beyond the type of packages, you should also consider other factors such as:

  • Lock in period
  • Partial or Full redemption penalty
  • Legal subsidy (if any) and the claw-back period
  • Cancellation fee
  • Valuation fee subsidy
  • Response time of the bank
  • Valuation (whether they can match your purchase price of the property)
  • Loan to valuation allowed

 

As you can see from the above, financing and refinancing your property can be a pretty complex exercise for the average layman. This is the reason many of our clients consult our Independent Mortgage Specialist at The Financial Network when they need a loan.After all, this is an absolutely free service to you. Should you have any queries, please contact us at enquiries@thefinancialnetwork.com.sg.