How Covid-19 is Affecting Singapore Home Loans

The Covid-19 outbreak is causing chaos in the global economy, and Singapore isn’t spared. There is, however, one silver lining: the current market disruptions are also causing the US to react, in a way that brings down the interest rate on Singapore home loans. Here’s how it works:

HOW THE US FEDERAL RESERVE IMPACTS SINGAPORE HOME LOANS

The US Federal Reserve (the Fed) sets interest rates based on the market situation. When the US economy is undergoing some form of crisis, such as the last Global Financial Crisis, or the current Coronavirus outbreak, the Fed sets interest rates lower. Right now, the interest rate is being set at near zero.

If there’s no interest, then banks – as well as consumers and businesses – are disincentivised from keeping large amounts of cash (who wants to keep money at zero growth, when the rate of inflation is always rising?)

What’s relevant to Singapore, however, is that a Fed rate cut will also eventually impact our banks. The Singapore Interbank Offered Rate (SIBOR), which indicates the lending rate between our banks, largely moves in tandem with interest rates in the US. As such, SIBOR will also fall when the Fed cuts rates.

HOW DOES SIBOR AFFECT YOUR HOME LOAN?

Some (not all) home loans are pegged to SIBOR. The interest rate you pay on your property consists of the bank’s spread, plus the prevailing SIBOR rate. For example, a typical SIBOR loan right now might be:

1M SIBOR + 0.7%

This means it’s whatever the one-month SIBOR rate is, plus the bank’s spread of 0.7%. You can check the current SIBOR rate on The Association of Banks in Singapore (ABS) website. At the time of writing, the SIBOR rate is about one per cent, so the above interest rate would be (1% + 0.7% = 1.7%).

At present, there are SIBOR-based loans that have fallen as low as 1.2 per cent per annum. Just for comparison, this is less than half the HDB loan rate of 2.6 per cent.

HOW MUCH DIFFERENCE DOES THIS MAKE IN YOUR MONTHLY REPAYMENT?

Say you have a home loan for the amount of $1 million, for 30 years, at a rate of about two per cent per annum. Your monthly repayment would be about $3,700.

But let’s say the rate drops to 1.7 per cent. Your monthly repayment would then fall to around $3,550, or lower by about $150 per month.

This may not seem like much, but remember that a home loan stretches over a long period. Over 30 years, accumulating lots of small savings like this can come up to significant sum (it also means higher capital gains when you eventually resell).

THIS SHOULD BE TAKEN INTO ACCOUNT WHEN REFINANCING THIS YEAR, OR WHEN PICKING A HOME LOAN (IF YOU ARE JUST ABOUT TO BUY).

For home owners with an existing mortgage, I’d encourage you to consider refinancing. If you’re not sure what this means or how to do it, drop me a message and I can explain the process. Home loan interest rates are falling, and are likely to remain low until the US recovers from the Covid-19 outbreak; that may be quite a while, as their economy will still need to recover in the aftermath.

There may be cheaper loan packages that you can refinance into, especially if you’re at the fourth year or later of your current loan (most home loans are cheaper in the first three years, but rise on the fourth).

For new home buyers, bear in mind the low SIBOR rates when picking a loan. This is because some types of home loan packages are not impacted by the falling SIBOR rate, or won’t take full advantage of it. For example:

Board Rate (BR) loans – these home loans have interest rates set by the bank, and are not tied to SIBOR. They may not change even as SIBOR rates fall.
Fixed / times Deposit loans – these are a variation of BR loans; they are pegged to different tranches of the bank’s fixed deposit rates. These may not move downward as quickly as SIBOR.
SIBOR loans with long interest rate periods – Most SIBOR loans use either the one-month or three-month rate, but some may have longer periods (e.g. six-month SIBOR). The interest rate period determines how frequently the loan is revised to meet the prevailing SIBOR rate; so a three-month SIBOR loan changes rate every three months, a one-month rate changes every month, etc. In theory, a long interest rate period is less favourable in this environment, as it will not fall as fast as the one-month rate.

Finally, for flat owners using HDB loans, note that you’re not affected by SIBOR. The HDB loan rate is always 0.1 per cent above the prevailing CPF rate (2.6 per cent right now), and hasn’t changed in almost two decades.

(You can use an HDB loan or a bank loan for your flat. You can also refinance from an HDB loan into a bank loan, but not the reverse).

While the lower interest rate may be tempting, don’t rush to switch from HDB to bank loans – there are certain key differences, such as HDB being more lenient with payment difficulties, and keeping a more consistent interest rate. Drop me a message, and I can help you to better understand which works for you.

WHILE SIBOR LOANS ARE GENERALLY GOING TO BE CHEAPER, YOU STILL NEED TO DO A LOT OF COMPARISON TO FIND THE BEST ONES

On any given month, only two or three of the banks offer the best loan rates – this is out of hundreds of possible loan packages, so be selective.

To truly benefit from this one silver lining, don’t just run toward the first bank that will give you a loan. There is zero reason to pick a home loan that costs more. You won’t get better service or anything special – you just get to pay more.

Again, do contact me so I can help you source for better options.

LOWER INTEREST RATES ARE A BOON TO HOME BUYERS AND INVESTORS ALIKE

The lower the interest rate, the more affordable your home loan becomes. I’m sure home buyers will appreciate the monthly savings, even if they’re not focused on capitals gains.

For investors, paying less interest means better rental yield on your rented properties. And the less you pay for interest, the better your eventual gains when you sell.

For more updates on home ownership and property investment, do like me on Facebook; I’ll keep you informed as the situation progresses.