One of the effects of Covid-19 is low-interest mortgages. Home loan rates are now at record lows, which may partly explain why Singapore’s private property has seen an uptick despite the pandemic. As a home owner, however, you may be feeling left out – perhaps your home loan rate is still high, or you’re not sure how to find the cheapest (there can be several hundred options on the market at any one time). In this article, I’ll explain how to pay less for your loan today:
Broadly speaking, home loan rates (from banks, not HDB) are determined in two ways:
The first is to have the loan pegged to the prevailing Singapore Interbank Offered Rate (SIBOR). You can check the SIBOR rates online. SIBOR loans consist of the bank’s spread, plus the SIBOR rate.
For instance, if the rate is 1M SIBOR + 1%, and the 1M SIBOR rate is 0.25%, then the interest rate is 1.25%. Note that the added one per cent is the bank’s spread.
The number in front of SIBOR indicated one month (1M) or three months (3M) SIBOR. These are the interest rate periods – they tell you how often your home loan rate is revised to meet SIBOR. So a 3M SIBOR loan, for instance, means your loan repayment amount is adjusted every three months.
(1M and 3M are the most common interest periods, but you may sometimes see longer periods of 9M, 12M, etc.)
Besides SIBOR, home loan rates can also be based on the bank’s “board rates”.
This simply means your bank decides the loan rate.
The most popular version of this today is fixed deposit loan rates, which means the bank ties your home loan rates to its own fixed deposit rates. In theory, this should discourage the bank from raising your interest rate, as they would then have to raise the interest they pay on deposits.
The current average is just 1.3 per cent per annum; about half the HDB loan rate of 2.6 per cent. This is expected to last till at least 2022, due to interest rate policies in the United States.
This is because, in times of crisis like Covid-19, the US likes to lower interest rates to stimulate the economy. This has a knock-on effect, of also lowering rates in other countries like Singapore.
The last time this happened was during the Global Financial Crisis in 2008/9, which kept home loan rates at below two per cent. While the rate was supposed to “normalise” and go up, Covid-19 has sent it crashing back down again.
If you’re using an HDB loan, then whether or not interest rates go down in the market won’t benefit you. HDB loans are pegged at 0.1 per cent above the prevailing CPF rate, which is why they’ve stayed at 2.6 per cent for close to two decades now.
If you’re using a bank loan, you need to check the terms of your loan package. Your bank may be charging a high spread, or you may have opted for a fixed-rate loan.
Here’s how to ensure you benefit the most from today’s current low rates:
1. Understand how to reprice and refinance
If your current home loan rate is too high, there are two things you can do about it:
The first is to reprice into a cheaper loan package. This means you’re switching to a cheaper loan within the same bank. Repricing is much cheaper than refinancing, and costs around $800 on average; but in some cases, your home loan may come with one or two free repricing options. This means you may not need to pay at all.
Say you have a home loan from bank X, which is at two per cent per annum. But earlier this year, bank X released a loan package that is at just 1.3 per cent per annum. You can choose to reprice, switching from your more expensive loan for the cheaper one.
The second option is to refinance into a cheaper loan. In this situation, you are switching to a home loan from a different bank entirely. This is a more expensive and involved process – the legal fees are often between $2,500 to $3,000, excluding any costs like a fresh valuation of your property.
In addition, some home loans may impose lock-in penalties, if you try to refinance (check the terms and conditions). Always wait till any lock-in period is over before refinancing; the cost of breaking a lock-in is almost never justified (typically 1.5 per cent of the undisbursed loan amount).
To work out whether it’s cost-effective to reprice or refinance, we’ll need to measure the potential savings (from lower interest) against the fees involved. Do contact me on Facebook, and I can help you work out if the savings are worth it.
2. Consider how rates might move in future
While interest rates are likely to stay low in the coming years, remember they can change. In the 1990’s, for instance, home loan rates were as high as four per cent.
While you can’t predict future rates, you can see how your bank’s spread will change. In general, the interest rate is always lowest for the first three years; the “fourth year and thereafter” rate is often much higher.
It might be worth holding on to your currently loan if the “thereafter” rate is cheaper; it’s not always wise to just chase the first three years of loan rates.
Of course, if you’re intending to sell the property soon to upgrade, etc., then your concern should be keeping the rates low till that point.
3. Get expert help to compare rates
There can be 50+ loan packages on the market, at any time you look. This is thanks to Singapore having over a dozen banks that offer home loans. Unfortunately, this also makes it difficult to know which are the cheapest – the banks that are the cheapest this month may not be the cheapest next month.
Likewise, you should know that the best rates may not be the ones actually advertised! It’s possible to negotiate further if you know the right market experts. Some borrowers manage to obtain rates that aren’t publicized, even on loan comparison websites.
As it’s usually not viable to call up each bank and check rates one at a time, do just drop me a message; I can help you find the cheapest current options.
If you’re just about to purchase your home, I suggest this doing this before you secure the Option to Purchase. It’s best to get your Approval In Principle (AIP) from the cheapest bank you can find, before you put down the deposit for your home.
(This helps to ensure you can get financing from the desired lender).
4. Don’t be confused by exotic loan features
To be frank, home loans are not well differentiated products. One home loan is much like the other, so the only thing that matters tends to be the interest rate.
Sometimes however, lenders will throw in unusual features. Examples are unusually long fixed-rate periods (e.g. no interest rate change for eight to 10 years), interest-offset (the interest from your bank account is used to offset your mortgage interest), and hybrid rates (the interest rate is based on the average of SIBOR as well as some other index).
These features can make the loan product extremely complicated. Most – not all – of the time, they exist only to justify a higher interest rate.
If you find they’re confusing you, just remember a simple rule: focus on getting the cheapest interest rate! That means looking beyond all the bells and whistles.
5. Go for properties that won’t raise financing issues
Some types of property are disliked by banks; and you may find the cheapest current lender won’t give you a loan (or will give you a more limited loan). Some of these property types are:
In these situations, some buyers are forced to take up a more expensive bank. In extreme cases, they may need to turn to non-banking financial institutions, which tend to charge much higher interest rates.
In general, it’s good to take a cue from the bank: if the bank doesn’t want to finance a property, it may be a sign for you to rethink it. There’s often a good reason why the bank is avoiding it. Do contact me, and I can help you point out red flags and alternatives.
This ensures you’re constantly aware of the interest rates, and can take action to keep them low. There are buyers who are oblivious to this, and end up paying unnecessarily high rates for years on end. All it takes, to save you thousands of dollars in the long run, is a quick check every few years.
For more news on the current real estate market in Singapore, and tips on home ownership, follow on RonChongProperty.net.