When it comes to home financing, there are two main loan types on the market: Singapore Interbank Offered Rate (SIBOR) loan and Fixed Home Rate (FHR) loan.
What is the difference between the two? And how do you know which loan works better for you? Let us break it down for you.
WHAT IS A SIBOR LOAN?
Let’s start by understanding what a SIBOR rate is. In a nutshell, it is the median rate at which Singapore banks lend money. The rate is government regulated and therefore, public information.
A SIBOR home loan has an interest rate that consists of the bank’s spread (how much the bank wants to charge), plus the prevailing SIBOR rate. So if the SIBOR rate is 1.7 per cent, and the bank’s spread is 0.7 per cent, then your interest rate would be (1.7 + 0.7 = 2.4 per cent).
There’s an interest rate period indicator, such as one-month SIBOR, three-month SIBOR, and so forth (it can go all the way to 12-month SIBOR, but one-month and three-month are the most common).
Banks commonly express this with an “M” in front of the rate – so when referring to the three-month SIBOR rate, they’d rate 3M SIBOR.
The interest rate period determines how often your bank loan interest changes. So if you have a 1M SIBOR loan, then your home loan rate changes every month. If you have a 3M SIBOR loan, then your rate changes every three months.
In general, 1M SIBOR is better when interest rates are falling (as your loan changes to match the downward rates faster), and 3M SIBOR is better when interest rates are climbing (it takes longer for your loan to match the rising rates).
To summarise, if you have a SIBOR rate, your interest rate might look something like this:
0.5 + 3M SIBOR
What that means is your interest rate is the bank’s spread (0.5 per cent), plus whatever the current 3M SIBOR rate is.
WHAT IS AN FHR LOAN?
An FHR loan is a form of Board Rate (BR) loan. This means the interest rate is not set by the market but rather, the bank gets to decide on the rate.
This form of loan was initially unpopular as it was assumed that the banks lured homebuyers in with low interest rates only to spike rates afterwards.
That changed when the FHR loan was introduced. The interest rate of this loan is pegged to a particular tranche (slice) of fixed deposits. This meant that when the bank raises its home loan rates, it would also be forced to pay out its fixed deposit holders more. This acts as a safeguard against the bank spiking rates.
Today, FHR loans are more common than the traditional SIBOR loans.
THE BIG QUESTION: WHICH LOAN IS CHEAPER?
While it is not immediately apparent which loan is cheaper, it is obvious which loan type has a more predictable repayment policy.
Predictability is vital when it comes to loan repayment. Choose a loan type based on your financial situation, rather than to try and guess which will turn out cheaper.
As a rule, SIBOR and FHR rates move in tandem – when one goes up or down, the other tends to follow. The difference lies in the fact that SIBOR rates tends to be more volatile – when SIBOR goes up, it usually moves up faster than FHR. The same is true when it goes down.
Another major difference is how often the rate changes: SIBOR rates change every month or every quarter of the year, whereas banks change their fixed deposits rates less frequently (sometimes only once a year).
As a rule of thumb, an FHR loan is suitable for individuals servicing the home loan with cash (instead of CPF) and a SIBOR loan will work well for individuals who are savvy at sniffing out cheaper refinance rates.
Enlist the help of a mortgage broker to help you decide which loan works best for you. Getting the right loan package is as important as buying a home for the right price.
This article first appeared on 99.co.