At a glance...
If you’re looking into purchasing a home, you’ll ultimately stumble upon something referred to as SIBOR while attempting to find the most inexpensive home loan.
Most people might mistake SIBOR for a particular sort of home loan, however in truth all home loans, regardless if they are fixed rate or floating rate loans, are basically influenced by SIBOR.
Now, what exactly is SIBOR and why is it so popular?
SIBOR stands for the Singapore Interbank Offered Rate, which is the average interest rate in which banks in Singapore lends money to each other. It is public knowledge as SIBOR is published on the daily at 3pm on the Association of Banks in Singapore (ABS) website.
Through the interaction of several independent and non-colluding banks, SIBOR can be determined. However, no single bank can cause SIBOR to go up or down in any way. Interbank lending and borrowing also decreases the incentive for any single bank to raise their rates beyond the competitive level.
These cause home loan rates to be directly influenced by SIBOR and are the most transparent and fair home loan rates available in comparison to board rates that banks may exert full control over. The SIBOR rate is also largely influenced by the prevailing interest rates that are determined by the United States Federal Reserve (US Fed).
Below is a table referring to the SIBOR rates during the first quarter of 2021:
|Month||1M SIBOR (3 month refresh)||3M SIBOR||12M SIBOR|
However, even SIBOR influenced home loans aren’t given the exact SIBOR rate by banks. Instead, banks will add a spread to it (X%), which is the amount they can earn from lending money to you. Banks tend to compete to offer customers the best SIBOR home loan rates by adjusting their spread.
SIBOR rates change by the month, which causes the monthly interest portion of your home loan to vary accordingly. Plus, some banks only offer SIBOR rates for private property home loans only.
For now, let’s use the example of a 3-month SIBOR home loan rate to calculate the spread (X%).
A 3-month SIBOR can be refreshed every three months. As such, on the first business day of the month, the bank will check the latest rate in order to update your home loan package.
At the moment, a 3-month SIBOR and 1-month SIBOR home loan packages are the most commonly seen in the industry nowadays.
Next up, we have some commonly asked questions regarding SIBOR answered below:
1. Is a 3-month SIBOR better than a 1-month SIBOR?
Typically, a 1-month SIBOR is lower than a 3-month SIBOR. However, it can be more volatile for the homeowner due to the changes that occur more often.
If your bank offers you a choice between a 3-month SIBOR or a 1-month SIBOR with the same spread, then your decision will depend on whether you expect interest rates to rise up or fall behind rapidly during the duration of your home loan package.
When the interest rate falls rapidly during your home loan package, it would make a lot more sense to choose a 1-month SIBOR, but you would need to consider if you are comfortable with paying a different rate each month.
When the interest rate is consistently low, homebuyers and owner may choose the option with the lowest interest rate while keeping to the lock-in period of three years.
Regarding SIBOR rates and the bank spread, it is ideal to get a spread that is as low as possible. This is why the best time to choose and lock-in a SIBOR home loan package is when the SIBOR rate has just begun to drop from a high-level, such as during the start of the COVID-19 pandemic in March 2020.
Banks will revise their spread upwards during such times when the SIBOR rates have fallen. This is in order to make other home loan packages they offer, such as the Fixed Deposit Home Rate packages, more enticing.
2. Is it safe to choose a SIBOR home loan package now?
SIBOR home loans are already the most transparent and fair amongst other home loan packages, especially when compared to board rates or fixed deposit-linked rates, which are controlled by the lending bank.
As mentioned prior, SIBOR is closely linked to an external factor, the United States Federal Reserve (US Fed). And as the US Fed rates are likely to remain low through 2023, SIBOR home loans are likely to be the preferred choice for homebuyers despite bank spreads having risen.
3. Should I refinance my loan to a SIBOR home loan package if I already own a home?
If you are thinking of refinancing to a SIBOR home loan when you already own a home with an existing loan, then it is most likely that you will benefit from switching to a SIBOR home loan if your loan amount is more than $300,000 (HDB flat), or $500,000 (private property).
At these loan amounts, banks will be glad to subsidise your refinancing costs. However, this does not mean that if your loan amount is below $300,000 or $500,000, then you should not go for a SIBOR home loan rate. After all, when your loan amount is lower, the overall interest that you need to pay is much smaller and you can afford it if the SIBOR fluctuates over the long term.
Anyway, banks and financial institutions have been seeing an increase in refinancing volumes due to homeowners finishing their lock-in periods for loans that began in 2017 to 2018. Right now, a 3-year lock-in period for a SIBOR home loan puts homeowners in a good position to refinance again when interest rates have been projected to rise in 2023 to 2024.
In a nutshell, when you are looking into purchasing a home, you should take into account all the factors such as if a 3-month or 1-month SIBOR home loan package works better for your situation or not, and if you should plan to refinance your home loan in the future.