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SIBOR or SOR? – Floating Your Way To Fix A Decision
The common dilemma for new home buyers or home owners seeking refinancing is to choose a home loan pegged to SIBOR or SOR. And in addition to that, there are fixed rate and various variable interest loans to ponder over. Variable rates usually take the form of interest rates that are neither fixed or pegged to an index. This means that the bank will have to power to change it as they deem fit according to their terms on contract. Even better, they are sometimes pegged to internal board rates that are determined by themselves.
Remember that bankers will always be motivated to recommend their own mortgage packages. They might try to offer freebies like grocery vouchers to make their deals attractive. But don’t forget that your focus should be on the most attractive terms that meet your own investment or housing objectives. Don’t get sidetracked by these marketing gimmicks and forget about the important stuff. The most frequently deliberated terms property buyers stress over are interest rates, lock-in period, and redemption penalties according to the brokers here. If you churn out the numbers, it really don’t make a lot of sense to pay 0.10% more just so you can get your hands on a $100 shopping voucher.
If you have arrived at the crossroad of whether to pick a SIBOR or SOR mortgage, it is assumed that you have decided to forgo fixed and variable packages. As variable rate loans tend to be less transparent, most home owners and investors do not favour them. To make sure that you know what you are doing, here are some reasons why people will choose fixed rates.
When interest rates are expected to rise quickly, having a fixed interest will shelter you from sudden spikes. And if you are a meticulous cash flow planner, this will also allow you to plan your finances in more detail as you will know exactly what are your mortgage repayment commitments over a period of time. Do bear in mind that the loan will be converted to a floating interest structure when the period of fixed rate expire. When that happens, you will have the option to refinance to a new fixed rate mortgage or continue with your current package.
SIBOR or SOR?
SIBOR is understood to be more stable while SOR is more volatile. But take heed that more stable does not mean that it is lower. And more volatile also means that there is always the possibility that sudden steep spikes can happen. For the last few years, SOR has been observed to be lower than SIBOR consistently, even running into a negative value in 2011.
The 2011 SOR crash was observed to have happened after a MAS intervention to strengthen the Singapore dollar. That might not have been the main trigger. But it is something that should be taken note of. If that is really a key factor of it’s movement, then we can assume that USD appreciation against SGD will cause SOR to rise and vice-versa. This radical movement of SOR cause a number of banks to completely removed SOR loans from their offerings as it is no longer profitable. This was a puzzle as the SIBOR or SOR is supposedly the cost of funds for the mortgage. The profit banks make is supposedly the spread added on top of the indexes. When we follow this line of thought, the performance of either one of the 2 has no impact on the profits of the banks. But in case you think that a negative SOR will mean that banks will pay you instead, think again. There is usually a floor rate stated in the terms and conditions. If that floor rate is 0.10%, then that is the amount that will be factored in instead of the negative value.
SIBOR is an acronym known to most households. Investors as well as regular households mention it all the time. Investors use it as a benchmark for costs of funds on their activities. Households know about it from monitoring their home loans. And since most banks offer SIBOR-pegged mortgages, any home buyer would come into contact with it sooner or later. Home owners might have never heard about it as they are on government HDB loans pegged to the CPF rate. But they will when reviewing their loans for refinancing to a bank.
The hallmark of SIBOR is the “stability” factor as can be observed from historical archives. The stability we are talking about is less volatility. These days, you can often find it remaining the same figure as the previous day. But SOR do not do that very often. It must also be noted that over the long term, when SIBOR rises, so does SOR.
When we put all these into perspective, it will appear that for households that prefer a floating adjustable rate compared to a fixed or variable one, SIBOR will be a better choice for the stability and peace of mind. Home owners or investors who have no issues keeping track of number will currently prefer SOR as it is lower. But don’t forget that even if you sign up for a SOR loan, you will still have the option to refinance if rates get too high for comfort. So you might as well take advantage of low interest while they are available. If not, when are you going to take advantage of them?