What HDB Upgraders Should Know About Bank Loans in 2020

With around 50,000 flats reaching their Minimum Occupancy Period (MOP) in 2020 and 2021, a lot of you are headed for the good life: pool, BBQ pit, club house, and a sold way to flex during next Chinese New Year. Hah, your cousin thinks his Masters is good; then why is he still in a four-room huh. But when you take that plunge, you’re also going to have to use bank loans – bye bye HDB’s simple and easy loan. Here’s what to know for the year:

1. This is not shaping up to be an ideal year for fixed-rate packages

Due to the coronavirus outbreak, several central banks around the world – including the important United Stated Federal Reserve (the Fed) – have implemented interest rate cuts. In particular, the Fed implemented a rate cut of 0.5 per cent in an unscheduled move.

The idea is that, when interest rates are lower, people will borrow and spend more, thus keeping the economy afloat.

How do things in the land of Guns, God, and Reality TV matter to you? Well, unlike your old HDB loan, many bank loans in Singapore are pegged to something called the Singapore Interbank Offered Rate (SIBOR). For example, the description of your home loan rate may look something like this:

3M SIBOR + 0.75%

This means your interest rate is based on the three-month (3M) SIBOR rate, whatever that may be at present, plus the bank’s spread (their “fee”) of 0.75 per cent.

The SIBOR rate is the median rate among 12 local banks in Singapore. As the interest rate in the US falls, the interest rate among these banks tend to move in tandem; as such, a rate cut by the Fed usually means a dip in the SIBOR rate, and lower interest repayments.

(Yes, bank loans are totally unlike your HDB loan, which has more or less stayed at 2.6 per cent for aeons. On the upside, the average bank loan has been cheaper than HDB loans since around 2008).

Given that SIBOR is headed down, it could make more sense to take advantage of lower rates with a floating rate loan, rather than a more expensive fixed-rate package.

2. You may want a shorter interest rate period

The SIBOR rate is different based on the interest rate period. For example, the one-month (1M SIBOR) usually has a lower rate than the three-month (3M SIBOR.)

Now the interest rate period determines how often your loan repayments are adjusted to match the current SIBOR rate. So a 1M SIBOR means your rate is changed to meet SIBOR every month, whereas 3M SIBOR means your rate is changed every three months.

You can also get packages that are 6M SIBOR, 9 M SIBOR, or even 12M SIBOR, but these types of packages are unusual. Most are either 1M or 3M only.

In general, it’s better to consider the shorter period (1M) when rates are headed down, and the longer period (3M or longer) when rates are headed up. This is because in theory, 1M SIBOR allows you to capture the lower interest rate as it shifts down every month, whereas 3M SIBOR leaves you still paying what may be a higher rate from three months ago.

The inverse is often held to be true during a rising interest rate environment.

Bear in mind this is not guaranteed, however; so you should speak to a mortgage broker for more detailed advice. But do at least raise the question, and be open-minded about it (we know some of you hate 1M SIBOR because you don’t like the fluctuations. But learning to embrace volatility can sometimes save you money).

3. Pay attention to repricing options, as the coronavirus outbreak is a short-term situation*

*Barring the possibility that it turns out to be virus of the century, and wipes most or all of human life. But if that happens, good news! The mortgage is no longer your main worry!

Repricing allows you to switch to another loan package within the same bank. It is not refinancing (that’s when you switch banks altogether).

Some loan packages come with one or two “free” repricing options. This means, for instance, that you may be able to switch from the same bank’s 1M SIBOR package to its 3M SIBOR package later. That can be helpful if interest rates start to normalise sooner than expected.

Also, do consider that repricing may be more convenient than refinancing when the rate drops. Refinancing can subject you to the same tedious loan application process, and typically costs $2,500 to $3,000. A free repricing can be much faster, and save you this money.

Do you find bank loan rates confusing and full of gibberish? Do you wish they were simpler? Well at least you didn’t have to sit through a whole course on it! Voice your thoughts in our comments section or on our Facebook community page.

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