By Marissa Lee, (Jan 13, 2015)
Home owners were caught by surprise last week when a key interest rate benchmark suddenly shot up after years of slumber.
It was a reality check for many and a sign of things to come as the era of cheap money begins to draw to a close.
Not that we are at sky-high rates yet or even that we are heading that way, but the trend is up.
The Singapore Interbank Offered Rate (Sibor), a key rate used to price most home loans, went up from 0.457 per cent a week ago to as high as 0.639 per cent.
The three-month Sibor had been limping along the 0.4 per cent mark since late 2010 as the United States kept short-term interest rates – to which the Sibor is highly correlated – low to get money flowing in its economy.
Now volatility in the global markets has reduced liquidity, and gone are the days when any day was a good day to refinance your home loan.
The Sibor’s climb signals tighter lending conditions to come, warns Mr Kumar Rachapudi, senior rates strategist at ANZ Asia.
The Sibor is fixed daily by the Association of Banks in Singapore based on quotes from banks on what they expect to pay for interbank loans that day. In short, it is affected by liquidity in the banking sector.
“Bank deposit growth has been sluggish relative to loan growth,” says Mr Rachapudi, noting that last November, bank loans grew 7.5 per cent from the same month a year ago, whereas bank deposits rose a meagre 2 per cent. “This has taken the loan-to-deposit ratio for Singapore banks to 111 per cent and is getting reflected in tight money-market conditions.”
Mr Rachapudi adds that he expects liquidity to stay tight in the near term, as accumulating deposits and reducing bank loans happen only slowly.
The consensus is that we are entering a new era of rising interest rates. Credit Suisse tips the three-month Sibor to rise to 0.8 per cent by the end of the year while United Overseas Bank (UOB) tips 1 per cent.
“We had expected the bullish move in the SOR and Sibor since last year,” says UOB economist Francis Tan.
“If the euro zone announces full-fledged quantitative easing, we will see an even stronger US dollar against the Singdollar, and the Sibor will move even higher.”
But Barclays economist Leong Wai Ho believes the Sibor’s spike will fade when the “bout of currency weaknesses and general risk aversion start to normalise”.
The three-month Swap Offer Rate (SOR) – another key interest rate that is determined by markets rather than fixed by banks and more responsive to the state of the US economy – fell last Wednesday from the peaks recorded earlier.
“If the drop continues in the coming days, Sibor should start retracing as well,” says Mr Leong.
Nevertheless, analysts agree that the Sibor will not be retreating too far back any time soon.
The market expects the US Federal Reserve to start raising rates in June, signalling that the party is over.
This sounds like a lot of doom and gloom but take a step back and you will see that the sub-1 per cent Sibor that home owners and property speculators have enjoyed over the past six years was more of an exception than the rule.
In fact, if you go back to before the 2008 financial crisis, a Sibor of 3.5 per cent was quite the norm.
As Credit Suisse economist Michael Wan puts it: “Low rates over the past few years were anomalous, driven by extremely loose monetary policy by major central banks around the world. This jump shouldn’t be a surprise – at current rates, Sibor is still at very low levels.”
While we know where the Sibor is headed, what we really want to know is whether refinancing a home loan amid rising interest rates can still save money.
Conventional wisdom has it that you should review your loan package every two to three years, or before the promotional period ends and your bank raises its premium on the interest you pay, which increases your monthly instalments.
Mortgage advisers report that a volatile Sibor and SOR have sent more Sibor-pegged home owners to them inquiring about a switch to a fixed-rate loan, but the choice is hardly that binary.
Here are a few things to watch out for when picking a loan package.
Most fixed-rate loans stay fixed for two to three years so you get some budgeting certainty. But after that, like any other package, higher “thereafter rates” kick in.
“The thereafter rate may be a very high board rate or a Sibor rate that has a very high spread,” says Mr Vinod Nair, chief executive of personal finance comparison site, MoneySmart.sg
“This puts you in a situation where you would have to consider refinancing again in another three to four years, when rates may have increased further.”
If you want to save yourself the hassle of refinancing your loan every three years, lock in a low thereafter rate.
If interest rates go up at a crazy pace and you have some money just sitting around, it makes sense for you to pay down as much of your loan quantum as you can.
That is, unless your bank imposes a penalty on early payments or prepayments.
Some banks like OCBC allow “flexible customisation of instalment payments to ease cash flow on a case-by-case basis”.
The bespoke home loan
Banks offer a wide array of mortgages, from fixed-rate loans to variable rates (pegged to Sibor or SOR), to hybrids.
DBS lets clients allocate their loan between fixed-rate and floating-rate packages to hedge their bets, while Citibank customers get unlimited switches on their Sibor-linked loan to the one-, three-, six- or 12-month Sibor, which could be useful if interest rates rise or fall.
But perhaps the biggest act of customisation banks exercise is price discrimination, where different customers get different rates based on their credit profiles or relationship with the bank.
“Home loan packages and interest rates vary according to the depth of the customers’ relationships with Citibank, among other factors,” says Mr Peng Chun Hsien, head of secured finance and e-business at Citibank Singapore.
But the catch is that unlike Sibor and SOR, these factors are qualitative, and thus negotiable. If you threaten to refinance to a more affordable package with a different bank, your bank might well show you some options for a repricing – a switch to a different package, but with the same bank.
Know your options
In the competitive home-loan financing sector, it’s not unlikely every now and then for a bank to roll out some sweet deals or teaser rates to gain market share.
“In fact, in a dynamic environment, all packages are subject to changes,” says Mr Sean Lim, founder of FindAHomeLoan.co.
Even for fixed-rate loans, banks can change their offerings every three to six months, sometimes even quarterly, say mortgage advisers.
That said, as interest rates are set to rise, you should not try to time the market for promotions, says Mr Lim. But there is no harm looking, and since you are required to give your bank advance notice if you intend to reprice or refinance your loan, you could make some inquiries while you are at it.
Tempting as it may be to switch loan packages based on upswings and downswings in interest rates, a housing loan is a long-term commitment of 15 to 20 years, says Mr Alfred Chia, chief executive of financial advisory firm SingCapital, which specialises in mortgage refinancing.
“You can’t make a decision based on the short term – the savings may be only temporary.”
For this reason, Mr Chia advises homeowners who are on the Housing Board’s concessionary loan plan with an interest rate of 2.6 per cent to stay put, as it is probably one of the cheapest financing options available.