Home loans tied to falling bank rate draw interest in Singapore

From the May 19, 2007 Straits Times:

“Loans based on Sibor get cheaper but if Sibor rises, so would loan rate

By Grace Ng, FINANCE REPORTER

A PLUNGE in a key interest rate has triggered a rush of enquiries from local borrowers about mortgages that let them cash in on cheaper money.

The rate – called the Singapore Interbank Offered Rate (Sibor) – hit a 20-month low of 2.3758 per cent yesterday and has fallen almost one percentage point since Feb 28.

This is starting to add up to cheap interest rates for home owners who took out mortgages tied to Sibor, which reflects the cost at which banks borrow money from each other.

As the Sibor falls, so do their rates. But it’s a gamble: if the Sibor rises, so does your mortgage rate.

Most are still paying slightly more than the rates offered for more standard loans. But if the Sibor keeps falling, the differential may go the other way, particularly as standard loan rates are stubbornly refusing to fall despite the banks’ access to cheaper money.

The Sibor-linked loan packages have become a hot ticket in recent months.

Borrowers like the increased transparency over how their rates are set and the chance to enjoy lower payments when the Sibor falls.

United Overseas Bank has seen ‘a healthy level’ of interest, while DBS Bank has received ‘thousands of enquiries’ over the past four months, although more traditional loans are still preferred.

The take-up rate for its Sibor-linked product ‘has increased by about seven times since January’, said Mr Koh Kar Siong, DBS’ head of secured loans for consumer banking.

Standard Chartered Bank is the latest to meet the demand with the launch yesterday of a Sibor-linked loan.

DBS charges a premium of an annual 1 per cent over the Sibor rate, while UOB and OCBC Bank add an annual 1 per cent over the three-month, six-month or nine-month Swap Offer Rates (SOR). The SOR comprise the Sibor plus a bank’s lending costs.

Stanchart adds an annual 0.5 per cent premium over the three-month SOR – now at 2.4503 per cent – for the first year. It also guarantees that the SOR will not exceed the 2.95 per cent annual rate for the first two years – a market first.

UOB’s head of loans, Mr Kevin Lam, said the ‘vast majority’ of customers taking up its package chose the three-month SOR as this rate moves faster with Sibor.

DBS and UOB said loans for Sibor-linked products are larger than the average home loans in their portfolio.

DBS’ average Sibor-loan size is about $700,000, reflecting the ‘more financially savvy investors’ who take out loans for larger properties, said Mr Koh.

They are betting that Sibor-linked rates will eventually dip below fixed and floating board rates, which range from 3.25 to 4 per cent.

These rates are not likely to be lowered for now, as banks said the drop in the Sibor is ‘a recent phenomenon’ and there is uncertainty if its decline will be sustained.

‘The general view is that mortgage rates are unlikely to be lowered this year, as they tend to lag behind deposit rates and interbank rates,’ said Mr Tan Chia Seng, Citibank’s business director.

But at least they are unlikely to rise. Any upside in rates ‘appears to be very much limited at this point in time’, Mr Koh said.

OCBC, which some mortgage brokers say has ‘not been pushing its SOR loans as aggressively as DBS and UOB’, said it has not had a big take-up of its Sibor-linked loans, despite more enquiries.

Even if Sibor fell further to make such packages more attractive, many people might remain wary as the Sibor can go up as well as down.

It was this concern that prompted Stanchart to offer a guaranteed maximum interest rate to give clients security.

That preference for predictability has seen DBS’ Home Ideal package, which is pegged to the stable CPF rate, experience a higher take-up than Sibor-linked packages.

Its take-up has shot up 13 times since last November, said Mr Koh.

graceng@sph.com.sg

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