WHAT interest rate are you paying on your housing loan? If
you are paying 3.5 per cent or more, you might be
overpaying. With the US Federal Reserve cutting interest
rates, the Singapore Inter-bank Offered Rate, or Sibor, has
been on a downward trend. Sibor is the rate at which banks
lend to one another. Currently, the three-month Sibor has
fallen to about 1.4 per cent, down from about 2.5 per cent
last year.
Banks have started lowering interest rates offered on
housing loans to as low as 2.08 per cent. Thus, if you're
paying an interest rate of 3.5 per cent or more, it might
make sense for you to refinance your housing loan to enjoy
interest savings. If consumers hold the view that interest
rates are likely to fall, choosing a housing loan package
pegged to Sibor would enable them to automatically enjoy
lower interest rates as Sibor moves lower.
For example, if your outstanding loan is $500,000 and
you're currently paying 3.5 per cent interest with a
remaining loan period of 20 years, the total interest
savings for the next three years from refinancing can work
out to $13,831.38. After factoring in the cost of
refinancing, the net interest saving still works out to
$13,331.38. Thus, by refinancing, you can be 'richer' by
over $10,000.
Floating rate vs Sibor/SOR pegged packages: Each bank will
usually set its own board rate and after deducting a
'discount factor', arrive at the floating (adjustable)
interest rate charged to clients. The problem is that each
bank will set its own board rate arbitrarily and there
might be occasions when Sibor rates fall, and banks don't
reduce the interest rates charged on floating (adjustable)
rate packages. Thus, in a bid to increase the transparency,
some banks have recently introduced housing loan packages
with interest rates pegged to Sibor or Swap Offer Rates
(SOR).
The advantage of such packages is that as and when
inter-bank offer rates move up or down, your interest rate
would be adjusted as well - it would not be at the bank's
discretion. Currently, Sibor/SOR have fallen below 1.4 per
cent and interest rates charged on such loans can be as low
as 2.08 per cent.
With the US expected to continue cutting interest rates in
the next few months, Sibor is expected to remain low or
even fall further in the next six to 12 months. Thus, if
consumers hold the view that interest rates are likely to
fall, choosing a housing loan package pegged to Sibor would
enable them to automatically enjoy lower interest rates as
Sibor moves lower.
Beware: Fixed rate packages typically come with lock-in
periods. Some banks recently also adjusted interest rates
charged on their fixed rate packages downwards to an
average of 2.58 per cent for the first three years.
However, such packages come with a penalty period of three
years. Thus, such packages might not be suitable for
consumers who intend to sell their property within the next
three years, as they are liable to a penalty fee.
Should you apply for a housing loan now for properties
purchased on a deferred payment scheme? You might have
purchased a property on a deferred payment scheme and only
need to take a loan when the project gets its Temporary
Occupation Permit (TOP), which might be in 2009 or 2010.
Should you apply for a housing loan now? By applying for a
loan now, you eliminate the risk of loan rejection should
there be any adverse change in your financial situation in
future, for instance, a pay cut or job loss when the
property is ready. You also eliminate the risk of banks
granting a lower loan quantum should the property market
turn and prices fall. To safeguard your interests, you can
choose a loan package that allows you a free loan
conversion so that you can switch to a better package
should one be available nearer TOP.
Cash in on your property without selling it: With property
prices having gone up in the past three years, you might
now own a property whose value has doubled. In that case,
your current debt-to-asset ratio might have fallen
considerably. For instance, say you bought a $1 million
property three years ago and took an 80 per cent loan, or
$800,000. Currently, the loan outstanding is about
$750,000, while the current value of this property might
have gone up to $2 million. This means your current
debt-to-asset ratio is only 37.5 per cent. How can you
benefit from the rise in the property price without selling
your property? You can consider taking an equity loan on
the property. For instance, in the above example, subject
to your credit score, banks might grant you an additional
equity loan of up to $850,000. To be conservative, you can
consider taking up a lower equity loan of, say, $450,000,
bringing your debt-to-asset ratio to a comfortable 60 per
cent. You can use the $450,000 equity loan granted by the
bank to start a business, or even to invest in another
property. The interest rate on equity loans in Singapore is
very low and can be as low as 2.2 per cent currently.
Should you pay off or reduce your housing loan?: The
Singapore government has projected the inflation rate in
2008 to be about 5 per cent. On the other hand, the
interest rate on housing loans is about 2.2 per cent. Thus,
we have a rare scenario of negative interest rates, that
is, a person who takes a housing loan is actually ahead of
someone who saves money in bank deposits because of the
shrinkage of money from inflation.
On the other hand, interest rates on bank deposits have
fallen to about 1.5 per cent. With inflation at 5 per cent,
it means that a consumer is losing 3.5 per cent a year by
putting money in bank deposits.
Instead of paying down your housing loan which charges low
interest rates of less than 3 per cent, you can consider
investing your cash in a stable investment that is not
subject to large price fluctuations and offers higher
returns than fixed deposits. One example is UK-traded
endowments, which have a guaranteed cash value and generate
annual returns of 6-8 per cent.
How to choose a suitable housing loan?: There are over 113
different housing loan packages available in Singapore at
any one time. Each package has its own unique features,
with its own pros and cons and different terms and
conditions. Consumers might be confused by the wide array
of choices. In the last few years, with the emergence of
independent mortgage brokers in Singapore, home loan
shopping and comparison have been made easier.
Basically, an independent mortgage broker who knows your
requirements can help you zoom in on the most attractive
home loan packages suitable to your needs. You typically do
not have to pay for the service of a mortgage broker as
banks pay them a fee.
In more advanced countries such as the US and Australia,
people usually apply for home loans through a mortgage
broker rather than go to the bank directly. In Singapore,
many people are still unaware of the services and benefits
of engaging a mortgage broker, but things are likely to
change with public education and increasing awareness.
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About The Author: Dennis Ng is a Certified Financial
Planner with 15 years of Bank Lending experience. He is
known as a Housing Loan expert and often quoted in
newspapers. He founded http://www.HousingLoanSG.com - a
leading mortgage consultancy in Singapore. You can send him
your comments to dennis@HousingLoanSG.com or call him at 65
6737 8801.
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