Home owners have been enjoying cheap loans for a long time on the back of historically low SIBOR. But, the party has ended and the fat lady is clearing her throat. Here’s how you can tackle the rising SIBOR.
Words by Calvin Yeo
What is SIBOR?
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We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
SIBOR, or Singapore Interbank Offered Rate, is the reference rate used by banks to determine how much it costs to borrow from each other. Most, if not all, banks use SIBOR as a tool to determine home loan packages – these packages are charged with a spread on SIBOR. For example, the bank might charge you SIBOR with an additional 1.25 percent. This means that the bank’s loan cost is SIBOR and the additional 1.25 percent is how much it earns from the home loan you’ve taken up.
Why did SIBOR suddenly shoot up?
For the past four years, the 3-month SIBOR has been staying relatively stable at approximately 0.4 percent. However, at the start of 2015, the rate suddenly jumped to more than 0.6 percent. One of the key reasons for this rise is due to a resurgent American economy, which caused the USD to strengthen against the SGD. Another reason is because of the weaknesses shown in Europe. There is strong speculation that the European Central Bank will be announcing a quantitative easing programme during their next meeting on 22 January. Analysts are also fearing that Greece might exit the region’s monetary union – the country is gearing up for their next elections on 25 January and the leftist opposition party is currently leading in the latest public opinion polls.
However, regardless of the sudden movements, analysts have already been predicting an upward trend in interest rates for some time. So, this should (hopefully) not come as a surprise to home owners who have done their homework. The government has also been warning about this eventuality for some time.
How will the SIBOR increase affect home owners?
I want to preface the next few paragraphs by explaining that in spite of the increase, the SIBOR’s current level is still historically low. As you can see from the SIBOR graph we’ve created below that spans about a 20-year period, the rates have generally been above the 1-percentage mark.
UOB has predicted that the SIBOR will go up to 1 percent this year while Credit Suisse is more conservative, predicting a rise to 0.8 percent instead. However, in the long run, we feel that homeowners should financially prepare themselves for SIBOR to be as high as 3.5 percent – interest rates were at that level prior to the 2008 financial crisis.
At the moment, you shouldn’t fret. We’ve ran the numbers and calculated that, at the moment, the recent spike in SIBOR should not cause a significant increase in your home loan repayment yet. Nonetheless, if SIBOR does normalise to pre-2008 crisis levels, your monthly repayment will exponentially increase the higher the loan quantum you borrowed and can even reach the thousand-dollar mark, if not more.
We’ve created two charts that demonstrates how much more you’ll be forking out for your payments based on a 30-year loan and an interest rate that is 1.25 percent plus SIBOR.
This is the graph for a $500,000 home loan.
This is the graph for a million dollar home loan.
For those who are not a big fan of graphs, here’s a table for the $500,000 loan.
|SIBOR Rate||Monthly Payments|
And one for a million dollar home loan.
|SIBOR Rate||Monthly Payments|
As you can see, your household needs to be able to reasonably absorb an increment of between S$1,000 to S$1,7000 for loans ranging from half a million to a million. The larger the loan, the more you would have to top up every month.
What can home owners do?
HDB owners who have opted for the HDB housing loan and its safety of a fixed interest rate can rest easy because the rise and fall of SIBOR won’t affect them. For those who have plumped for a SIBOR-dependent home loan from the banks to take advantage of the historically low SIBOR in the past few years, don’t fret. You might be tempted to try to refinance for fixed rates now but ask yourself whether it makes sense. Generally, the problem with Singapore home loan packages from banks is that the low fixed interest rates are only for the first few years. Thereafter, the rates rise rather significantly.
For example, OCBC has a short-term fixed interest rate home loan package that goes from 1.5 percent in the first year to a whopping 3.75 percent (dependent on the bank’s internal rate) from the fourth year onward. If you choose to refinance now, we’re certain that the first-year rates will no longer be as low. However, if SIBOR doesn’t exponentially increase in the next few years, you may be better off sticking to a SIBOR package which has SIBOR + 1.25 percent and then, think about refinancing when your lock-in period ends.
It always makes commercial sense to reprice or refinance after the lock-in period ends as interest rates usually increase. However, even if the rates don’t increase at the end of your lock-in period, we always recommend that you explore repricing or refinancing from your current bank or other banks in an attempt to reduce the spread. You’ll be surprised at how much the banks are willing to compromise based on your loan quantum, as they would rather have you as a customer than risk losing your business (and your money) to another bank.
In terms of the most optimal refinancing or repricing strategy, unfortunately there is little you can do to navigate the rising interest rates. The most important thing that you can do is to anticipate the increase in interest rates and make sure your budget is in a position to safely absorb the increased monthly repayments. Use mortgage calculators to model up to a SIBOR of 3.5 percent to be safe and see how it affects your expenses and budget. This is what you need to be prepared for.
At the end of the day, you have to remember that financing a property in Singapore is not just for a few years but for a few decades. Don’t be too hasty and put yourself in a financial position that could be over-leveraged with just an increase of a few percentage points in interest rates. The era of cheap loans are at an end and it’s best to be ready instead of being caught unprepared.