SIBOR Hike – What You Can Do With Your Current Loan | Propertylogy

SIBOR Hike – What You Can Do With Your Current Loan

By on January 7, 2015

The big news this week that was worthy of a few minutes in the primetime news was the hike in SIBOR. So steep is the rise that it overshadows the increase of SOR even though SOR exploded in the last few weeks, with hardly any media coverage. If you are already on a housing loan or in the midst of choosing one, surely you will have come across this acronym called SIBOR. If you don’t know what it literally represents, it is Singapore Interbank Offered Rate. It is the rate where banks in Singapore lend to each other.

It is an index rate that affects every homeowner whether they like it or not. Because even when your loan has no SIBOR element whatsoever, the level SIBOR is at will affect the determination of the rate you are paying. This is due to SIBOR affecting the costs of funds of your lending bank.

When we put it that way, one may start to wonder why mortgages to consumers are linked to interest rates charged by banks on each other. If a bank needs to borrow money it does not have in order to lend to a home buyer, what kind of a business is it? And if a bank does have the funds to lend to a property buyer and does not have to borrow funds for it, why does it have to link their home loan rates to an interbank rate? And if the costs of funds are represented in the dynamic nature of SIBOR over time, why are consumers being charged a spread that rises with time? Well these are legitimate questions and I’m sure there are comprehensive answers that will satisfy the curiosity in you. But probably only those at the highest level will know exactly how the system works and the little details that ensures an efficient monetary system.

As a regular home owner, actually all that is most important is that you might have a home loan linked to SIBOR or about to accept one. Now what can you do? How will the increase affect you? What are your options?

sibor hike chart trend1) Start switching the term

If you don’t already know, SIBOR comes in various terms. It used to have 1 month, 2 month, 3 month, 6 month, 9 month, and 12 month. Now there are no longer terms for 2 month and 9 month. Each term will have a different rate. Common sense will tell us that the longer the tenor, the higher the rate will be. (However, do note that sometimes there are anomalies that give a higher tenor a lower rate)

The most common term used for mortgages is the 3 month SIBOR.

You might have a loan that allows you to switch between the different terms. So if you feel that a sudden jump in SIBOR is on the cards in the near future, switching to a 12 month SIBOR can help you sidestep a sudden hike in rates… but only until the next refresh period. This feature present in some loans can be a deadly tactic if you are able to play it right.

2) Convert your loan

Most mortgages offered by banks have a free conversion feature within the first year of the loan, or within a certain period after TOP of under construction properties. So if your current loan is still in it’s infancy, there is every likelihood that you are still within the period to convert your loan without incurring any penalty fees. If your home has yet to TOP, look out for the period of time where you can exercise your conversion option.

Take note that a conversion is not refinance or a re-pricing. You are essentially staying with the same bank. Just that you convert your loan to a different interest rate structure depending on what is available at that point in time. Please practice caution in that you should not exercise the conversion option for the sake of it. Do your numbers and weigh up what you are more comfortable with. Then make your decision and stick to it without regret. Doing nothing is also an option.

If you bought an under construction property in recent years

If your house is nearing TOP within a few months or already TOP, your home will be classified as a completed property. Being classified as a completed property swings your options for fixed rate housing loans wide open. So you should have a few choices of fixed rate loan packages when converting your loan. If not, you can consider refinancing which is the next topic discussed below. Most loans for under construction property has no lock in period. So you will not incur redemption penalty charges when switching banks. However, do flip through your contract to see if there are cancellation charges when your funds have yet to fully disburse.

3) Go fix your rate by refinancing

In the recent years leading up to 2015, it has always appeared that home loans with fixed rates are higher than loans that include a SIBOR element. It is basic financial sense. If a bank is willing to offer a fixed rate on your loan, it has to charge higher to compensate for the extra risks that is being undertaken. This leads to fixed rates that are slightly higher to SIBOR home loans at that point in time when the enquiry is made.

So it is a little amusing now to see that there are housing loans with fixed rates lower than SIBOR related loans. For example a fixed rate of 1.20% is lower than 3mSIBOR (0.46%) + 0.75%. And we were just talking about anomalies earlier. This is an anomaly.

Well if this is the case, should everyone rush off into the sunset holding their fixed rate loan papers in a united cheer? Well, it depends.

Unlike some territories overseas, there are no 20 year fixed rate mortgages in Singapore. Even HDB loans are determined by the CPF rate, which is not fixed. A regular fixed rate loan from a bank will eventually revert to a variable or floating nature after the period of fixed interest. Usually between 1 to 5 years.

Meaning if your loan reverts to a SIBOR linked loan in future, you would end up in square one. And if you are to revert to a variable board rate loan, you could also be paying through your nose as banks will adjust their board rates accordingly with the rising costs of funds.

I can however, see many people rushing off to refinance their loans to fixed rates.

4) Request for a reprice

A repricing is simply getting your current lender to change the interest structure of your existing loan. It is not the same in definition as refinancing to another lender. Repricing is the easiest thing you can do and should be the very least you should do. The funny thing is that intuitively, we would think that as an existing customer, a bank would treat us like gold and make every effort to move mountains just to retain us. In reality, weirdly, the opposite is what you will more likely face.

If you are within a lock-in period with your current mortgage, lenders would probably hold their ground and refuse to entertain any requests for repricing. They might be more receptive if you are outside the lock-in period without any redemption penalties. However, this does not mean that you now hold all the cards. Very often, homeowners would be counter-offered with packages that are not as attractive with what are available in the market. You might even feel like they are daring you to move your loan elsewhere.

From the outside looking in, I don’t understand why not more is done by lenders to retain their customers. I know what I will do if I don’t feel like a valued client. If I have been a client for a service for 3 years, I don’t see why better terms are given to a new customer when I have been putting profit into the service provider’s pockets for such long time.

5) Redeem your loan

Despite the huge rush for home loans in recent years to buy property, a huge number of investment property buyers can actually afford to pay for their purchases in cash. It is only with the purpose of using leverage that this group of buyers decide to borrow instead of using their own money.

If you are one of these cash rich homeowners who can afford to fully repay the bank, this is definitely the time to seriously consider whether to do it or not. You can avoid the rising interest charges. But if fixed deposit rates are giving you 1% and redemption of a loan will save you 0.40%, the logical decision looks pretty obvious. Don’t forget that you can also choose to partially redeem your loan with the spare cash sitting in your savings or current account that is earning a miniscule interest.

6) Sell your house immediately

I’m kidding 😀

Final words

Even though 3 month SIBOR has hiked close to 50% in a snap, it must be noted that the rise is from around 0.40% to around 0.60%. Although 50% looks like a scary staggering number, the actual rise in real number terms is just around 0.20%. In the context of historical values and the grand scheme of things, this is like a starter in a 10-course meal. You might want to take action now, or you might want to wait for the real main course to be served. Be mindful that by the time of the main course, there is every possibility that your best course of action has already passed by since rates are consistently inching up.

Experts have been talking about the inevitable rise in interest rates for the last 3 years. The sudden spike is a surprise. But so is the extended period of extraordinarily low interest rates. Do your calculations and don’t make a decision on your loan based on a panic attack.

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