The WEEKEND TODAY ran an article on what you should look out for when shopping for a home loan.
Below is information that we find particularly helpful:
1. For every 1% increase in interest rate, the monthly instalment will rise by about $500 for a $1 million loan stretched over 30 years.
2. Ideally, home owners should have a holding power of at least two to three years and ensure that monthly loan repayments are not more than 35% of the gross monthly household income.
3. While the current low SIBOR (Singapore Interbank offer Rate)/SOR (Swap Offer Rate) -pegged home loans allow home buyers to capitalise on lower interest rates, such loans are more volatile in nature. Borrowers’ monthly instalments will vary with the constant changes in cost of funds and would be first to be affected by higher repayments in a rising interest rate environment.
4. Floating board-rate loans offer more stability as the mortgage rates do not vary with SIBOR/SOR. In addition, packages with no lock-in periods give home owners the flexibility to do partial repayments at no additional cost, without having to time the partial repayment at the SIBOR/SOR re-pricing date.
In a rising interest rate environment, such packages are advantageous over loans pegged to SIBOR/SOR as the impact on the cost of funds is not immediate.
5. Fixed rate loans offer the most stability. However, such loans come with a premium and home owners could be tied to a higher fixed rate while cost of funds remains low. These loans are suitable for owner occupiers and those with a longer investment horizon as partial repayments are generally restricted with penalty.
6. Home owners may consider splitting their loan into a fixed rate loan and a floating rate loan to hedge against any increase in interest rates and allow greater flexibility in repayment under the floating rate loan.
7. Other factors to consider include penalties for partial prepayment or redemptions and conditions for refund of legal fee and valuation fee subsidies granted during loan take-up.
The wife and I certainly find the need to "time the partial repayment for SIBOR/SOR loan at the re-pricing date” somewhat of a hassle. First you have to know/remember when these dates occur (e.g. loan pegged to 3-month SOR will be re-priced at the end of every 3 months), then make a note to give the bank 1 - 3 months’ notice of partial repayment (depending on the contract terms) prior to that date. More often than not, you will find yourself missing the re-pricing date… at least we did, twice!
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3 comments:
Seems like most bank I talk to are encouraging floating rates instead of fixed. All seems very confident that rates will remain low.
I am not very sure of this. Sibor is now 0.4++%. I think the only direction is up....
Are:
We are hearing increasing market sound bites that interest rates may increase a little (maybe by 25 - 50 basis points) in the near term.
Since the beginning of the year, we have been cautioning about the danger of interest rate increase to anyone who bothers to listen. However, given the low low rates at the moment, people are generally not too concerned about the impact of rate increase.
We can only hope that it is really just the 25 -50 basis points increase that people have to worry about...
Yes. Agree on ur observations.
That could be the reason why most banks are pushing for a floating rate. Not sure if that translate to more commission $$ for them :)
Even a 50 basis point will push the effective rate to be around 1.3% given that most of the current spreads for sibor-pegged loan are at + 0.8%
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