Unlike conventional loans, you should never pick a home loan package in Singapore based on interest rate alone. Banks are always evolving and looking at ways to differentiate their home loan interest rates. Unfortunately, many feature advantages and disadvantages that aren’t always obvious. Thankfully, we can help you pick between them.
The three most common types of home loan interest rates in the country are fixed rate home loans, internal board rate (IBR) or board rate (BR) loans, and Singapore interbank offered rate (SIBOR) loans. For each of these home loan interest rate types, we’ve included important tips and suggestions to take on board when deciding which one to pick.
Fixed Interest Rate Home Loans
Fixed-rate mortgage loans make it easier to plan in a financial sense. You’ll always know exactly what you will pay each month for as long as the fixed rate period lasts. These loans are highly popular, especially as interest rates continue to increase. For instance, the typical interest rate now stands at 2% per annum, but it was as low as 0.9% in 2009. If you opt for a fixed-rate loan, you’re able to lock in a good rate.
A fixed-rate loan is always set in stone during the fixed-rate period. Should you go down the route of refinancing or switching to a cheaper loan package during this time, you’ll incur a steep penalty. This normally stands at 1.5% of the outstanding loan amount. As you would expect, it’s never worth paying the lock-in penalty. Fixed-rate loans tend to cost far more compared to mortgage loans in Singapore, especially when factoring in the floating rates the loan will revert to at the end.
Try and look for a fixed interest rate period of two years. Never go beyond this. The reason for it is simple. You cannot refinance without a penalty throughout the fixed rate period. If you’re looking for a housing loan, Property Guru can be of assistance. They compare the best housing loan in Singapore, so you don’t have to.
Board Rate (BR) or Internal Board Rate (IBR) Loans
BR or IBR loans revolve around interest rates that the bank sets. For the majority of the time, banks will try and be competitive. They’ll keep the rates close to or potentially below what’s available on the market. Some banks haven’t changed their interest rates in many years, regardless of the rising interest rate environment. In some cases, you can seek out board rates that are far cheaper than what is available on the market.
Unlike the SIBOR rate, the interest rate movements of BRs and IBRs aren’t very transparent. What’s more, they’re also unilaterally controlled by the bank. This can raise rates at any time. Regarding BR loans, they’re all a matter of trust. It boils down to how much you trust your bank not to increase rates and to give you a suitable deal.
For the most part, BR loans should be the last thing you consider taking out. Banks, like any business, are driven by profit margins. Such profit margins are linked to the interest earned from home loan interest rates. When you decide to accept the bank’s rate, they have the ability to increase the home loan interest rates as a ‘business decision’ whenever they like. Unfortunately, this will be at your expense.
Singapore Interbank Offered Rate (SIBOR)
SIBOR is the median rate at which Singapore banks are lending to one another. It’s regulated and monitored by the Monetary Authority of Singapore (MAS). Singapore mortgage loans normally use the 3-month or 1-month SIBOR rate. With a 1-month SIBOR rate, your home loan will be revised to match SIBOR each month. Regarding a 3-month SIBOR loan, your home loan will be adjusted to match SIBOR every 3 months.
One of the main advantages of the SIBOR rate is it’s transparent and not monitored by any single bank. What’s more, choosing this option could save you money. This is because they tend to go down more quickly when compared to other home loan interest rates.
The flip side to this is when interest rates increase, SIBOR rates follow the same trajectory and at a faster rate than other home loan types. As the SIBOR fluctuates, it can be difficult keeping track of how much you are actually paying. It’s also important to note that SIBOR is expected to be discontinued completely by 2024, with the SORA interest rate set to take its place. As each bank has the same SIBOR, the only part of the interest rate they’re in charge of is the bank’s spread. This means it’s more important than ever to pick a bank that has the lowest spread.
As we have already mentioned, there are pros and cons to each of the home loan options above. It’s your responsibility to weigh up the advantages and disadvantages, so that the one you pick aligns with your finances.