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Showing posts with label SIBOR. Show all posts
Showing posts with label SIBOR. Show all posts
Wednesday, April 3, 2013
Monday, February 18, 2013
Tips for Interest Saving on Your Home Loan
by SUSAN TEO
This article highlights some ways to lower the interest payable on your loan.
Loan quantum or loan tenure
The most straightforward way to save on interest payment is to opt for a loan with a lower loan quantum or a shorter loan tenure. The downside is that there will be greater financial outlay (either CPF or cash).
Because with a lower loan quantum, you will have to make greater upfront payment. Whereas with a shorter loan tenure you will have to incur higher monthly installment payment.
The logic is simple. For a lower principal, the interest chargeable falls because it is a percentage of the former, and a higher monthly installment payment will reduce the principal faster.
Partial prepayment
You can make prepayment above the monthly agreed amount. This will effectively lower the principal, and hence interest payable. But many loans come with a lock-in period (aka. reimbursement period), typically the first 2 to 5 years of the loan tenure, during which partial or full repayment could involve a penalty of usually at most 1.5% of the re-payed amount. However, some loans do not have a lock-in period or its penalty only applies to full repayment.
(Note: For the aforementioned points, it will involve greater cash outlay; hence if there are other investments you can make with the monies you should weigh carefully if the potential gains can exceed the interest savings from paying off your mortgage faster or opting for a lower loan amount.)
Loan type
HDB or bank loan
Keep abreast of interest rate conditions and the economic policies of Singapore's major trading partners. These will affect the interest rates of loans.
As a rule of thumb:
During a low interest rate environment, it might be best to select a bank loan rather than a HDB loan if it happens that you are purchasing public housing. A bank loan will normally offer lower interest rate compared to a HDB loan in a low interest rate climate. But besides the interest payment, there are other deciding factors in taking a loan. For a more detailed comparison between the two, read these:“Explaining the Advantages of HDB Loans versus Bank Loans” and “A Quick Look at the Drawbacks of HDB Loans”.
Bank loans
For private properties, you can only finance them with bank loans.
With bank loans, you can choose from a selection of loan types. The most common being the fixed rate loan and floating (variable) rate loan.
In general, the rates on a floating (variable) rate loan is lower than for a fixed-rate loan because bankers need to hedge against the risks of keeping rates unchanged. However, during a high interest rate environment, it is possible than the upswings in rates for a floating (variable) rate loan result in greater interest payable compared to a fixed-rate loan. To decide between the two types of loans, you may want to read “Fixed-Rate Versus Floating Rate Home Loan Packages in Singapore: Which is Right for You?”.
Specifically, for a floating (variable) rate loan, to lower interest rate, you can consider a shorter tenure SIBOR or SOR. As shorter tenure usually has lower rates than the longer tenure ones.
However, shorter tenure comes with faster changes to the rates. For example, for a 1-month SIBOR, banks revise it at 1-month or 3-month interval. Whereas for a 12-month tenure, it is only revised every 12 months.
So when interest rates start to climb, you can end up with higher rate for the 1-month SIBOR. Below illustrates this
Initially:
1-month SIBOR = 0.31%
12-month SIBOR = 0.57%
3 months later:
1-month SIBOR = 0.80%
12-month SIBOR = 0.57%
But, at the end of the day, which will cost you more in interest payment will also depend on the spread. Because the interest rate always has a margin added to the SIBOR or SOR. The interest rate payable then is actually X-tenure SIBOR + spread, or X-tenure SOR + spread.
Another way to reduce interest payment is to select an interest offset loan. This is suitable for people with a large amount of idle cash in the bank. A portion of this deposited sum will earn a special interest rate that exceeds what is normally offered for bank deposits. The earned interest can then be used to offset the interest payable on the housing loan.
Loan features
Some floating (variable) rate loans have special features like an interest rate cap. This will translate into cost saving in case of an interest spike.
Refinancing or repricing
If you currently already have a housing loan, you can always terminate the existing loan and apply for a new one. The aforementioned points can serve as guidelines in your new loan selection.
An ideal time to switch loan package is after the lock-in period, as you will not have to incur a penalty. Your current financier may offer a free one-time conversion (i.e. repricing) to a package you are eligible for. Or they may charge a conversion fee.
Conversely, you can refinance, which means changing into a mortgage with a different financier.
For a detailed discussion of what to look out for in refinancing, check out our other article: “A Guide to Housing Refinancing in Singapore”. This article also illustrates the cost saving you can enjoy with refinancing, even during the penalty period.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
This article highlights some ways to lower the interest payable on your loan.
Loan quantum or loan tenure
The most straightforward way to save on interest payment is to opt for a loan with a lower loan quantum or a shorter loan tenure. The downside is that there will be greater financial outlay (either CPF or cash).
Because with a lower loan quantum, you will have to make greater upfront payment. Whereas with a shorter loan tenure you will have to incur higher monthly installment payment.
The logic is simple. For a lower principal, the interest chargeable falls because it is a percentage of the former, and a higher monthly installment payment will reduce the principal faster.
Partial prepayment
You can make prepayment above the monthly agreed amount. This will effectively lower the principal, and hence interest payable. But many loans come with a lock-in period (aka. reimbursement period), typically the first 2 to 5 years of the loan tenure, during which partial or full repayment could involve a penalty of usually at most 1.5% of the re-payed amount. However, some loans do not have a lock-in period or its penalty only applies to full repayment.
(Note: For the aforementioned points, it will involve greater cash outlay; hence if there are other investments you can make with the monies you should weigh carefully if the potential gains can exceed the interest savings from paying off your mortgage faster or opting for a lower loan amount.)
Loan type
HDB or bank loan
Keep abreast of interest rate conditions and the economic policies of Singapore's major trading partners. These will affect the interest rates of loans.
As a rule of thumb:
During a low interest rate environment, it might be best to select a bank loan rather than a HDB loan if it happens that you are purchasing public housing. A bank loan will normally offer lower interest rate compared to a HDB loan in a low interest rate climate. But besides the interest payment, there are other deciding factors in taking a loan. For a more detailed comparison between the two, read these:“Explaining the Advantages of HDB Loans versus Bank Loans” and “A Quick Look at the Drawbacks of HDB Loans”.
Bank loans
For private properties, you can only finance them with bank loans.
With bank loans, you can choose from a selection of loan types. The most common being the fixed rate loan and floating (variable) rate loan.
In general, the rates on a floating (variable) rate loan is lower than for a fixed-rate loan because bankers need to hedge against the risks of keeping rates unchanged. However, during a high interest rate environment, it is possible than the upswings in rates for a floating (variable) rate loan result in greater interest payable compared to a fixed-rate loan. To decide between the two types of loans, you may want to read “Fixed-Rate Versus Floating Rate Home Loan Packages in Singapore: Which is Right for You?”.
Specifically, for a floating (variable) rate loan, to lower interest rate, you can consider a shorter tenure SIBOR or SOR. As shorter tenure usually has lower rates than the longer tenure ones.
However, shorter tenure comes with faster changes to the rates. For example, for a 1-month SIBOR, banks revise it at 1-month or 3-month interval. Whereas for a 12-month tenure, it is only revised every 12 months.
So when interest rates start to climb, you can end up with higher rate for the 1-month SIBOR. Below illustrates this
Initially:
1-month SIBOR = 0.31%
12-month SIBOR = 0.57%
3 months later:
1-month SIBOR = 0.80%
12-month SIBOR = 0.57%
But, at the end of the day, which will cost you more in interest payment will also depend on the spread. Because the interest rate always has a margin added to the SIBOR or SOR. The interest rate payable then is actually X-tenure SIBOR + spread, or X-tenure SOR + spread.
Another way to reduce interest payment is to select an interest offset loan. This is suitable for people with a large amount of idle cash in the bank. A portion of this deposited sum will earn a special interest rate that exceeds what is normally offered for bank deposits. The earned interest can then be used to offset the interest payable on the housing loan.
Loan features
Some floating (variable) rate loans have special features like an interest rate cap. This will translate into cost saving in case of an interest spike.
Refinancing or repricing
If you currently already have a housing loan, you can always terminate the existing loan and apply for a new one. The aforementioned points can serve as guidelines in your new loan selection.
An ideal time to switch loan package is after the lock-in period, as you will not have to incur a penalty. Your current financier may offer a free one-time conversion (i.e. repricing) to a package you are eligible for. Or they may charge a conversion fee.
Conversely, you can refinance, which means changing into a mortgage with a different financier.
For a detailed discussion of what to look out for in refinancing, check out our other article: “A Guide to Housing Refinancing in Singapore”. This article also illustrates the cost saving you can enjoy with refinancing, even during the penalty period.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Friday, January 11, 2013
Fixed-Rate Versus Floating Rate Home Loan Packages in Singapore: Which is Right for You?
By SUSAN TEO
It goes without saying that a mortgage is a great financial liability; choosing the correct home loan packages will save you both money and mental anguish. This article looks at the two of the most common types of mortgage. This is not an exhaustive guide, instead it hopes to offer some basic insights.
Typically, fixed rate packages have interest rates that are higher than a floating rate loan. After the fixed rate period ends, the interest rates will be converted to variable rates. Specifically, the interest rate will be pegged at a discount below the financing institution's board rate or floating rate, which is based on SIBOR or SOR. Below is an example of the interest structure for a fixed rate loan:
Bank Y Fixed-rate Loan
After the first few years of the loan start-date, the spread is usually revised upward. An example follows
Bank Y SIBOR Loan
But this financial stability comes with a price.
During a low interest rate environment, the borrower will have to contend with a higher opportunity cost (best foregone alternative). Because with a floating rate package he will get to enjoy relatively lower interest. Thus there is a trade-off between financial stability and interest payment.
On the other hand, during high interest rates environment, the borrower will not find himself on the horns of a dilemma. The choice is a straightforward one. Taking a fixed rate package will bring with it a lower opportunity cost and greater financial certainty (at least during the fixed rate period!). Furthermore, as the financiers need to hedge their future risks by providing you a fixed rate for several years, the interest rates for fixed-rate packages are usually more costly than for floating-rate.
Nevertheless, a floating rate package will always involve more interest rate volatility. A way to mitigate this is to opt for a longer tenor SIBOR or SOR. For example, a 12-month SIBOR or SOR rates is revised every 12 months, so you get to enjoy fixed rate for a year!
Conversely, you can consider an interest rate capped loan which safeguards against unexpected spike in rates. For example, Bank A's mortgage loan cap sets a 1.50% p.a. limit on the interest, so 1.50% is the highest interest you will have to pay even during a high interest rate environment.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
It goes without saying that a mortgage is a great financial liability; choosing the correct home loan packages will save you both money and mental anguish. This article looks at the two of the most common types of mortgage. This is not an exhaustive guide, instead it hopes to offer some basic insights.
What is a fixed rate package?
As its name suggests, a fixed rate loan has its interest rate fixed. However, in Singapore, we only have packages with rates that are fixed for the first 3 to 5 years of the loan tenure. There are no perpetual fixed rate packages here. The availability of such packages depends on whether the lenders provide such packages.Typically, fixed rate packages have interest rates that are higher than a floating rate loan. After the fixed rate period ends, the interest rates will be converted to variable rates. Specifically, the interest rate will be pegged at a discount below the financing institution's board rate or floating rate, which is based on SIBOR or SOR. Below is an example of the interest structure for a fixed rate loan:
Bank Y Fixed-rate Loan
Period
|
Interest Rate (p.a.)
|
| First Year |
1.15%
|
| Second Year |
1.35%
|
| Third Year |
1.45%
|
| Fourth Year Onwards |
0.50 % below the Board Rate
|
What is a floating (aka variable) rate package?
In contrast, a floating rate loan has its interest rates fluctuating during the entire duration of the loan. Today's floating (variable) interest rate loans come in three flavours:- Interest rates pegged at a discount below the Board Rate
- Interest rates pegged at a margin (spread) above SIBOR
- Interest rates pegged at a margin (spread) above SOR
After the first few years of the loan start-date, the spread is usually revised upward. An example follows
Bank Y SIBOR Loan
Period
|
Interest Rate (p.a.)
|
| First Year |
0.75% + 1-Month SIBOR
|
| Second Year |
0.75% + 1-Month SIBOR
|
| Third Year |
1.00% + 1-Month SIBOR
|
| Fourth Year Onwards |
1.25% + 1-Month SIBOR
|
When is a fixed rate package preferred?
- Financial stability is needed
- High interest rates environment
But this financial stability comes with a price.
During a low interest rate environment, the borrower will have to contend with a higher opportunity cost (best foregone alternative). Because with a floating rate package he will get to enjoy relatively lower interest. Thus there is a trade-off between financial stability and interest payment.
On the other hand, during high interest rates environment, the borrower will not find himself on the horns of a dilemma. The choice is a straightforward one. Taking a fixed rate package will bring with it a lower opportunity cost and greater financial certainty (at least during the fixed rate period!). Furthermore, as the financiers need to hedge their future risks by providing you a fixed rate for several years, the interest rates for fixed-rate packages are usually more costly than for floating-rate.
When is a floating (aka variable) rate package preferred?
- Low interest rates environment
Nevertheless, a floating rate package will always involve more interest rate volatility. A way to mitigate this is to opt for a longer tenor SIBOR or SOR. For example, a 12-month SIBOR or SOR rates is revised every 12 months, so you get to enjoy fixed rate for a year!
Conversely, you can consider an interest rate capped loan which safeguards against unexpected spike in rates. For example, Bank A's mortgage loan cap sets a 1.50% p.a. limit on the interest, so 1.50% is the highest interest you will have to pay even during a high interest rate environment.
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Wednesday, December 26, 2012
Understanding SIBOR and SOR Based Home Loans in Singapore
By SUSAN TEO and PAUL HO
As a small, open economy that depends largely on imports for most of its needs, Singapore adopts an exchange rate policy, which curbs import-based inflation. Specifically, Singapore makes use of a managed float regime, whereby the Monetary Authority of Singapore (MAS) manages the Singapore dollar against a basket of currency of its main trading partners, but allows it to fluctuate between an undisclosed band. Thus the interest rate in Singapore is determined by world money markets. It follows closely the interest rate of the countries in the basket of currency, of which the US dollar makes up a main component. Consequently, there is a correlation between the US interest rates and that of Singapore's.
Bank X SIBOR Loan
Source: www.iCompareLoan.com
Source: www.iCompareLoan.com
Source: www.iCompareLoan.com
Thus borrowers will be wise to focus on the spread instead. They should opt for packages with a reasonable spread throughout the loan duration. Summarising the features of both SIBOR and SOR:
Source: www.iCompareLoan.com
From Figure 4, a 1-month SIBOR is generally lower than a 3-month SIBOR as seen over the past 20 years, therefore borrowers may want to consider a 1-month SIBOR if the spread being offered is also attractive.
Given the many factors to consider when deciding on the best loan package, the borrower may prefer to seek experts' advice, like the free professional help available at www.iCompareLoan.com or simply fill up an enquiry form at http://www.iCompareLoan.com/contact
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
As a small, open economy that depends largely on imports for most of its needs, Singapore adopts an exchange rate policy, which curbs import-based inflation. Specifically, Singapore makes use of a managed float regime, whereby the Monetary Authority of Singapore (MAS) manages the Singapore dollar against a basket of currency of its main trading partners, but allows it to fluctuate between an undisclosed band. Thus the interest rate in Singapore is determined by world money markets. It follows closely the interest rate of the countries in the basket of currency, of which the US dollar makes up a main component. Consequently, there is a correlation between the US interest rates and that of Singapore's.
What is Singapore Inter-bank Offered Rate (SIBOR)?
SIBOR is the interest rate at which banks and financial institutions in Singapore borrow from each other. It is similar to the London Interbank Offered Rate (LIBOR). Set by the Association of Banks in Singapore, SIBOR is transparent and announced daily through the mainstream media. Many home loan packages offered in Singapore are pegged to SIBOR. SIBOR comes in different blends of 1-, 3-, 6- , 12-month. So the 1-, 3-, 6-, 12-month SIBOR are the interest rates for borrowing for 1, 3, 6 and 12 months, respectively. The longer the tenor the higher the rate is.What is Singapore Swap Offer Rate (SOR)?
In contrast, SOR is the lending costs and the expected forward exchange rate between the US dollar and Singapore dollar. Upon maturity of the SOR tenor, there is a Forex conversion from US dollar to Singapore dollar, but there is no bid and spread, therefore the banks save money amongst themselves. As SOR can be interpreted as currency swaps between the US dollar and Singapore dollar, it has slightly more volatility compared to SIBOR and current movements impacts the trading volume of the SOR contracts. SOR is also set by the Association of Banks in Singapore and comes in different blends of 1-, 3-, 6- , 12-month.What are SIBOR and SOR pegged home loans?
Floating (variable) interest rate loans in Singapore make use of SIBOR or SOR as the variable component in the interest rate. Most loan packages follow the 1- or 3-month SIBOR or SOR. The interest rate for the loan will be defined as spread + SIBOR or spread + SOR. What is spread? The margin that the financing institutions add to the loan is called the spread. Using a concrete example, for an interest rate of SIBOR + 1%, the +1% is the spread. The spread is usually revised upward, after the first few years of the loan start-date. As an example:Bank X SIBOR Loan
| Period | Interest Rate (p.a.) |
| First Year | 0.75% + 1-Month SIBOR |
| Second Year | 0.75% + 1-Month SIBOR |
| Third Year | 0.75% + 1-Month SIBOR |
| Fourth Year | 1.00% + 1-Month SIBOR |
| Thereafter | 1.25% + 1-Month SIBOR |
Advantages and Disadvantages of SIBOR and SOR
Contrary to popular belief, it is not always true that during a low interest rate environment, borrowers with a SOR-pegged package will necessarily enjoy lower rates than with a SIBOR-pegged loan. Although SOR and SIBOR are somewhat correlated, and the former tends to fluctuate more, the fluctuations of SOR can be above or below SIBOR. This is seen in Figure 1, 2 and 3, which show the most commonly used tenor of 1-month and 3-month.
Figure 1: 1-Month SIBOR/SOR for Jan 2012-Dec 2012
Source: www.iCompareLoan.com
Figure 2: 3-Month SIBOR/SOR for Jan 2012-Dec 2012
Source: www.iCompareLoan.com
Figure 3: 3-Month SIBOR/SOR for Dec 2006-Aug 2012
Thus borrowers will be wise to focus on the spread instead. They should opt for packages with a reasonable spread throughout the loan duration. Summarising the features of both SIBOR and SOR:
- Shorter tenor SIBOR has usually lower rates than the longer tenor SIBOR (Because it is riskier and there is a higher opportunity cost for longer term lending)
- Shorter tenor SIBOR is usually more volatile than the longer tenor SIBOR
- SIBOR fluctuates less than SOR
Figure 4: 1-Month and 3-Month SIBOR for Jan 1989-Dec 2012
From Figure 4, a 1-month SIBOR is generally lower than a 3-month SIBOR as seen over the past 20 years, therefore borrowers may want to consider a 1-month SIBOR if the spread being offered is also attractive.
When to choose between 1-month SIBOR and 12-month SIBOR?
While a shorter tenor SIBOR may mean lower interest, but borrowers have to contend with greater instability as rates are revised at shorter intervals. For example, for a 1-month SIBOR the rate revision period can vary between 1 or 3 months, depending on the financing institutions. In contrast, with a 12-month SIBOR the borrowers may have to pay higher interest but the rate remains constant for 12 months.Given the many factors to consider when deciding on the best loan package, the borrower may prefer to seek experts' advice, like the free professional help available at www.iCompareLoan.com or simply fill up an enquiry form at http://www.iCompareLoan.com/contact
Read more articles at
PropertyBuyer.com.sg/articles
SingaporeHomeLoan.net/blog/
iCompareLoan.com/resources/category/faq/
Thursday, November 13, 2008
MORTGAGES FAQ - SINGAPORE
TYPES OF MORTGAGES
By www.PropertyBUYER.com.sg
09 Nov 2008
The numbers stated herein are for illustration purposes only.
Fixed Rate Packages: -
This is the most traditional package. Home owners have certainty over future payment amounts. Fixed rate packages are often discounted off from a “Board Rate” or “housing loan rate” or some other terminology introduced by the bank. Fixed rate loans may be offered for 1 year, 2 years or longer depending on the prevailing packages that banks offer.
For example, a bank may have a “board rate” of 5% while they can offer a housing loan to you at 3%. This simply means that the bank offers you a loan of (Board rate – 2%)
Staggered Fixed Rate Packages
Often Banks would try to induce customers to sign-on to a package with a cheap entry point, but the bank would typically make their money back in the later years with more expensive interest rates. The function of increasing interest rates in later years plays 2 functions, 1st as a means to increase profitability, 2nd as a means to reduce the risks as banks undertake risks in guaranteeing fixed rates.
For example: -
• Year 1 = “Board Rate 5% – 2%” = 3% (fixed for 1 year)
• Year 2 = “Board Rate 5% - 1.5%” = 3.5% (fixed for 1 year)
• Year 3 = “Board Rate 5% - 1%” = 4% (fixed for 1 year)
* Year 4 onwards = "Board Rate" = ???% (Prevailing Board Rate at the 4th year)
Depending on the bank, the bank may specify that the rate is Board Rate - 2%, board rate - 1.5%, etc, at the point of issuing the offer, however the Board Rate is only used as a reference and serves no purpose other than to build into the document the "Board Rate" because on the 4th year, the interest rates reverts to "BOARD RATE".
Other banks may completely omit mention of the board rates if their later years reverts to a SIBOR/SOR + Margin rate.
Variable Rate Packages
Variable rate packages are often pegged to a Bank’s “Board rate” or “Housing Rate” or any similar terminology.
For example: -
• Year 1 = “Board Rate 5% - 2.5%” = 2.5% (not fixed)
A bank may at it’s discretion change the “Board Rate” based on it’s own calculation of positive or negative spread within a basket of "loans" pegged to a "Board Rate". Variable rates tend to be cheaper than Fixed rate loans because the bank has the ability to change the rates at any time, thereby reducing their risks. The risks of fluctuation interest rates is passed on to the consumer.
As there were previously some grievances against banks that raise their “Board Rates”. The complaints leveled at banks were that they are not transparent enough as to when to raise the rates. Variable packages which offered a SIBOR or SOR pegged rates become popular.
SIBOR/SOR PEGGED VARIABLE PACKAGES
SIBOR = Singapore Interbank Offered Rate
SOR = Swap offered Rate (SOR is the bank's cost of funds)
What is 1-month Sibor, 3-months Sibor, 6-months Sibor and so on?
These are Fixed deposit rates that the banks offer other banks within the Association of Banks in Singapore (ABS).
Does the rate vary every month? Every 3 months? Every 6 months?
The rates vary daily. The rates changes based on supply and demand of funds available for lending at any point in time within the interbank market. Once a bank takes up a loan, for example SIBOR (1 month) at 1.25%, it is equivalent in lay-man's term to us borrowing a loan that needs to be repayed in 1 month, the interest rate is fixed at 1.25% for 1 month.
So if I sign up to a SIBOR (1 month) for my Home Loan, what does this mean?
For example, your loan is S$1m, when you sign up for a Sibor (1 month) loan for your mortgage, the bank will go to the interbank market to borrow S$1m at the point of disbursement of funds or slightly just before that. If on the day of the disbursement, the rate is 1.29% and the bank charges SIBOR (1 month) + 0.7%, the bank will charge you 1.99% for that 1 month.
Your loan interest rates will be Re-priced every month!
SIBOR/SOR pegged variable packages gives the home owner the transparency. Banks simply offer a “SIBOR + Bank Margin” package.
However there are the 1-month SIBOR rate, the 3-month SIBOR rate and 1-year SIBOR rate packages as well as the equivalent SOR packages.
Example: -
• SIBOR + 0.75%
1-month SIBOR is re-priced every 1 month while a 3-month SIBOR is re-priced every 3 months. This means, your loan repayment quantum changes every month or every 3-months depending on your choice of the peg.
This types of loans are transparent but highly volatile. Because the bank undertakes very little risk, it is usually able to offer the cheapest loan out of the many different possibilities of loans out there.
FIXED AND VARIABLE MIXES
Some banks now offer a variety of Fixed and Variable loans where the home owner is able to specify the percentage of loan to be fixed and variable.
VARIABLE PACKAGE LINKED TO A CURRENT ACCOUNT
This type of mortgage is most useful to businesspeople. They allow a home owner to offset their outstanding loan amount with money deposited in a designated current account linked to the mortgage. This is called Interest offset account.
Example: -
• Mortgage amount for Home is S$800,000.
• But the Home Owner is cash rich and has an emergency fund of S$300,000 which he/she doesn’t need to use, he/she can leave it in the designated account (which he/she can withdraw at anytime).
• Outstanding Mortgage amount = Mortgage amount – Account Balance
• Interest rate = 2%, that means interest cost is S$16,000 (per year) for S$800,000.
• But since the home owner has S$300,000 which he/she doesn’t need to use yet, he/she leaves this S$300,000 in the designated account. The outstanding loan amount is S$500,000, and therefore the interest cost is reduced from S$16,000 --> S$10,000. A saving of S$6,000 while still retaining the financial flexibility.
• Interest rate payment is based on prevailing outstanding balance.
DRAWING MONEY FROM YOUR HOUSE (TERM LOANS)
Most banks will lend you up to 80% and sometimes even 90% of the valuation of your home. Some home owners will suddenly find that their home valuation has gone up. Consequently, the banks are willing to lend you more money.
Example: -
Previous valuation of your property = S$800,000
Mortgage Loan amount @ 80% = S$640,000
Outstanding loan = S$500,000 (An illustration: incl CPF used, eg. 100K)
New valuation of your property = S$1,200,000
Possible Loan amount @ 80% = S$ 960,000
Net Additional Cash borrowings = S$ 960,000 – S$500,000 = S$460,000
For example the interest rate is 2.5%. This is considered very low interest rates because unsecured loans typically cost > 10% in currently.
This money if used carefully is considered the lowest possible rate, which you can use for purchasing another property, pay for your children’s education or travel the world or start a business. Any lower interest rates, you will have to borrow from your parents.
The result of this package is: -
* Mortgage will be S$400,000
* Term Loan will be S$460,000
INTEREST PAYMENT ONLY PACKAGES
Uses either Fixed or float, however the home owner pays only interests and does not pay down the principle. This type of packages are suitable for people who needs the extra cashflow or for investors looking for maximum leverage to boost Return on Invested Capital. This can be a risky proposition in cash flow becomes an issue.
http://www.propertybuyer.com.sg/viewnews.php?article=21
SUPER COMBO PACKAGES
This option involves a Bridging scenario. A home owner staying in his/her existing place (Property A) buying another property (Property B) while trying to sell his existing property.
Property A and Property B involved
* Refinance of Property A to Sibor/SOR package with No redemption penalty, in anticipating of a sale.
* Equity Loan (A term loan tied to property A and B) from Property A to pay for part of downpayment of Property B.
* Property B using Equity Loan from Property A was able to stick within the Loan to valuation (LTV) of smaller or equal 80% and hence enjoys cheaper interest rates.
* Property B borrows 80%, of which 40% is Fixed rates for 3 years and 40% is Sibor/Sor based Floating rate.
* There is also an interest offset current account (Can offset interest against the Variable rate) with a Built-in Over-draft facility.
We have seen more complex cases and we are happy to help you with it.
PENALTY AND LOCK-IN PERIOD
Most banks want to lock you in from typically between 2 years to 5 years. This is because many banks use a step-up interest method where the later year interest rates are higher. Consequently the penalties of breaking the loan at Year 1 may be higher than Year 2.
Example: -
Penalty for full redemption of Loan within year 1 = 2% of outstanding loan amount.
Penalty for full redemption of Loan before year 2 = 1.5% of outstanding loan amount.
LEGAL FEE CLAWBACK
Banks typically offer you legal fee subsidy of 0.4% of loan amount subject to maximum of S$4,000 (for very big loans), but typically S$2,000 (some banks more, some less). In the case of an early redemption (Usually within 3 years), the house owner will be required to pay-back the full legal fees.
Many Property Buyers DO NOT know that they can choose their lawyers. Sometimes they used the given panel of conveyancing lawyers, the rates can be higher. An example, most Condominiums within S$1.5 to S$2m price range, their legal fees should be no more than S$2,000 to S$2,300. Any more, you are over-paying and it will cost you when you refinance.
HOME VALUATON FEE CLAWBACK
Some banks offer free valuation of your property as part of their mortgage loan offers. Other banks offer free valuation of your property provided that you do not redeem your loan within a specified period (Usually 2 years or 3 years). You are most likely required to reimburse the bank at the point of Loan redemption.
The valuation typically cost between S$150 to S$500 for apartments and condominiums, but can cost between of S$1000 to S$10,000 in landed property depending on the land size, property built-up size and terrain.
Some banks give generous VALUATION SUBSIDY, make sure that in case you have a CLAW BACK Clause, push the banks to use your own approved Valuer, because this ultimately comes out from your pocket.
FIRE INSURANCE
There is usually no claw back for fire insurance beyond 1 year of the loan. But it depends on the banks.
MORTGAGE INSURANCE
Most banks do not provide Mortgage insurance in a Home Loan Finance or refinance deal. However some banks have started to cross-sell products from different divisions or re-sell products by insurance companies by putting in a form together with your Home loan package. Mortgage insurance is usually preferred for Joint-Tenancy ownerships. Because in the unfortunate event of the mortality of 1 partner, the partner takes over the assets, but the joint-tenancy partner (Usually a spouse) also take over the debt servicing, if any.
The above is an article provided by www.PropertyBUYER.com.sg
By www.PropertyBUYER.com.sg
09 Nov 2008
The numbers stated herein are for illustration purposes only.
Fixed Rate Packages: -
This is the most traditional package. Home owners have certainty over future payment amounts. Fixed rate packages are often discounted off from a “Board Rate” or “housing loan rate” or some other terminology introduced by the bank. Fixed rate loans may be offered for 1 year, 2 years or longer depending on the prevailing packages that banks offer.
For example, a bank may have a “board rate” of 5% while they can offer a housing loan to you at 3%. This simply means that the bank offers you a loan of (Board rate – 2%)
Staggered Fixed Rate Packages
Often Banks would try to induce customers to sign-on to a package with a cheap entry point, but the bank would typically make their money back in the later years with more expensive interest rates. The function of increasing interest rates in later years plays 2 functions, 1st as a means to increase profitability, 2nd as a means to reduce the risks as banks undertake risks in guaranteeing fixed rates.
For example: -
• Year 1 = “Board Rate 5% – 2%” = 3% (fixed for 1 year)
• Year 2 = “Board Rate 5% - 1.5%” = 3.5% (fixed for 1 year)
• Year 3 = “Board Rate 5% - 1%” = 4% (fixed for 1 year)
* Year 4 onwards = "Board Rate" = ???% (Prevailing Board Rate at the 4th year)
Depending on the bank, the bank may specify that the rate is Board Rate - 2%, board rate - 1.5%, etc, at the point of issuing the offer, however the Board Rate is only used as a reference and serves no purpose other than to build into the document the "Board Rate" because on the 4th year, the interest rates reverts to "BOARD RATE".
Other banks may completely omit mention of the board rates if their later years reverts to a SIBOR/SOR + Margin rate.
Variable Rate Packages
Variable rate packages are often pegged to a Bank’s “Board rate” or “Housing Rate” or any similar terminology.
For example: -
• Year 1 = “Board Rate 5% - 2.5%” = 2.5% (not fixed)
A bank may at it’s discretion change the “Board Rate” based on it’s own calculation of positive or negative spread within a basket of "loans" pegged to a "Board Rate". Variable rates tend to be cheaper than Fixed rate loans because the bank has the ability to change the rates at any time, thereby reducing their risks. The risks of fluctuation interest rates is passed on to the consumer.
As there were previously some grievances against banks that raise their “Board Rates”. The complaints leveled at banks were that they are not transparent enough as to when to raise the rates. Variable packages which offered a SIBOR or SOR pegged rates become popular.
SIBOR/SOR PEGGED VARIABLE PACKAGES
SIBOR = Singapore Interbank Offered Rate
SOR = Swap offered Rate (SOR is the bank's cost of funds)
What is 1-month Sibor, 3-months Sibor, 6-months Sibor and so on?
These are Fixed deposit rates that the banks offer other banks within the Association of Banks in Singapore (ABS).
Does the rate vary every month? Every 3 months? Every 6 months?
The rates vary daily. The rates changes based on supply and demand of funds available for lending at any point in time within the interbank market. Once a bank takes up a loan, for example SIBOR (1 month) at 1.25%, it is equivalent in lay-man's term to us borrowing a loan that needs to be repayed in 1 month, the interest rate is fixed at 1.25% for 1 month.
So if I sign up to a SIBOR (1 month) for my Home Loan, what does this mean?
For example, your loan is S$1m, when you sign up for a Sibor (1 month) loan for your mortgage, the bank will go to the interbank market to borrow S$1m at the point of disbursement of funds or slightly just before that. If on the day of the disbursement, the rate is 1.29% and the bank charges SIBOR (1 month) + 0.7%, the bank will charge you 1.99% for that 1 month.
Your loan interest rates will be Re-priced every month!
SIBOR/SOR pegged variable packages gives the home owner the transparency. Banks simply offer a “SIBOR + Bank Margin” package.
However there are the 1-month SIBOR rate, the 3-month SIBOR rate and 1-year SIBOR rate packages as well as the equivalent SOR packages.
Example: -
• SIBOR + 0.75%
1-month SIBOR is re-priced every 1 month while a 3-month SIBOR is re-priced every 3 months. This means, your loan repayment quantum changes every month or every 3-months depending on your choice of the peg.
This types of loans are transparent but highly volatile. Because the bank undertakes very little risk, it is usually able to offer the cheapest loan out of the many different possibilities of loans out there.
FIXED AND VARIABLE MIXES
Some banks now offer a variety of Fixed and Variable loans where the home owner is able to specify the percentage of loan to be fixed and variable.
VARIABLE PACKAGE LINKED TO A CURRENT ACCOUNT
This type of mortgage is most useful to businesspeople. They allow a home owner to offset their outstanding loan amount with money deposited in a designated current account linked to the mortgage. This is called Interest offset account.
Example: -
• Mortgage amount for Home is S$800,000.
• But the Home Owner is cash rich and has an emergency fund of S$300,000 which he/she doesn’t need to use, he/she can leave it in the designated account (which he/she can withdraw at anytime).
• Outstanding Mortgage amount = Mortgage amount – Account Balance
• Interest rate = 2%, that means interest cost is S$16,000 (per year) for S$800,000.
• But since the home owner has S$300,000 which he/she doesn’t need to use yet, he/she leaves this S$300,000 in the designated account. The outstanding loan amount is S$500,000, and therefore the interest cost is reduced from S$16,000 --> S$10,000. A saving of S$6,000 while still retaining the financial flexibility.
• Interest rate payment is based on prevailing outstanding balance.
DRAWING MONEY FROM YOUR HOUSE (TERM LOANS)
Most banks will lend you up to 80% and sometimes even 90% of the valuation of your home. Some home owners will suddenly find that their home valuation has gone up. Consequently, the banks are willing to lend you more money.
Example: -
Previous valuation of your property = S$800,000
Mortgage Loan amount @ 80% = S$640,000
Outstanding loan = S$500,000 (An illustration: incl CPF used, eg. 100K)
New valuation of your property = S$1,200,000
Possible Loan amount @ 80% = S$ 960,000
Net Additional Cash borrowings = S$ 960,000 – S$500,000 = S$460,000
For example the interest rate is 2.5%. This is considered very low interest rates because unsecured loans typically cost > 10% in currently.
This money if used carefully is considered the lowest possible rate, which you can use for purchasing another property, pay for your children’s education or travel the world or start a business. Any lower interest rates, you will have to borrow from your parents.
The result of this package is: -
* Mortgage will be S$400,000
* Term Loan will be S$460,000
INTEREST PAYMENT ONLY PACKAGES
Uses either Fixed or float, however the home owner pays only interests and does not pay down the principle. This type of packages are suitable for people who needs the extra cashflow or for investors looking for maximum leverage to boost Return on Invested Capital. This can be a risky proposition in cash flow becomes an issue.
http://www.propertybuyer.com.sg/viewnews.php?article=21
SUPER COMBO PACKAGES
This option involves a Bridging scenario. A home owner staying in his/her existing place (Property A) buying another property (Property B) while trying to sell his existing property.
Property A and Property B involved
* Refinance of Property A to Sibor/SOR package with No redemption penalty, in anticipating of a sale.
* Equity Loan (A term loan tied to property A and B) from Property A to pay for part of downpayment of Property B.
* Property B using Equity Loan from Property A was able to stick within the Loan to valuation (LTV) of smaller or equal 80% and hence enjoys cheaper interest rates.
* Property B borrows 80%, of which 40% is Fixed rates for 3 years and 40% is Sibor/Sor based Floating rate.
* There is also an interest offset current account (Can offset interest against the Variable rate) with a Built-in Over-draft facility.
We have seen more complex cases and we are happy to help you with it.
PENALTY AND LOCK-IN PERIOD
Most banks want to lock you in from typically between 2 years to 5 years. This is because many banks use a step-up interest method where the later year interest rates are higher. Consequently the penalties of breaking the loan at Year 1 may be higher than Year 2.
Example: -
Penalty for full redemption of Loan within year 1 = 2% of outstanding loan amount.
Penalty for full redemption of Loan before year 2 = 1.5% of outstanding loan amount.
LEGAL FEE CLAWBACK
Banks typically offer you legal fee subsidy of 0.4% of loan amount subject to maximum of S$4,000 (for very big loans), but typically S$2,000 (some banks more, some less). In the case of an early redemption (Usually within 3 years), the house owner will be required to pay-back the full legal fees.
Many Property Buyers DO NOT know that they can choose their lawyers. Sometimes they used the given panel of conveyancing lawyers, the rates can be higher. An example, most Condominiums within S$1.5 to S$2m price range, their legal fees should be no more than S$2,000 to S$2,300. Any more, you are over-paying and it will cost you when you refinance.
HOME VALUATON FEE CLAWBACK
Some banks offer free valuation of your property as part of their mortgage loan offers. Other banks offer free valuation of your property provided that you do not redeem your loan within a specified period (Usually 2 years or 3 years). You are most likely required to reimburse the bank at the point of Loan redemption.
The valuation typically cost between S$150 to S$500 for apartments and condominiums, but can cost between of S$1000 to S$10,000 in landed property depending on the land size, property built-up size and terrain.
Some banks give generous VALUATION SUBSIDY, make sure that in case you have a CLAW BACK Clause, push the banks to use your own approved Valuer, because this ultimately comes out from your pocket.
FIRE INSURANCE
There is usually no claw back for fire insurance beyond 1 year of the loan. But it depends on the banks.
MORTGAGE INSURANCE
Most banks do not provide Mortgage insurance in a Home Loan Finance or refinance deal. However some banks have started to cross-sell products from different divisions or re-sell products by insurance companies by putting in a form together with your Home loan package. Mortgage insurance is usually preferred for Joint-Tenancy ownerships. Because in the unfortunate event of the mortality of 1 partner, the partner takes over the assets, but the joint-tenancy partner (Usually a spouse) also take over the debt servicing, if any.
The above is an article provided by www.PropertyBUYER.com.sg
Monday, November 10, 2008
NETWORKING EVENT BY: MGSM Students and SHRI (INVESTING IN PROPERTY?)
Please note, this event is an event by Macquarie Graduate School of Management students and is not endorsed by Macquarie University or MGSM.
Sunday, August 31, 2008
Singapore Private Residential Property Prices Trend - Guesstimates
quote: "Success is a thought process"
Where is Singapore's Private Property prices headed? In order to make accurate guesses, many variables must be used to gauge the past and therefore determine/guess the future.
Let us take a look at the Singapore's M1 Money Supply.
Chart adapted from Monetary Authority of Singapore MAS time-series data.
According to Investopedia, M1 money supply is, "A category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts.
This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency."
In order words, M1 is a measure of how much money is in circulation. And overly quick acceleration of M1 money supply could stoke inflation if the amount of goods and services do not match the pace of the increase in money supply.
Let's take a look at the Singapore Private Property Price Index.
(Source: Singstat.gov.sg)
There do not seem to be much correlation between M1 supply and Property prices. So let's move on to look at the growth rate of M1 money supply. But what explains the huge increase in M1 supply? M1 stimulates the GDP though it is debatable whether there is a lag and how long the lag is.
Chart adapted from Monetary Authority of Singapore time-series data.
By looking at the above chart, it seems that M1 more or less track GDP, except that there is a run-away increase in M1. I am not quite sure what is the break-down or exact source of this increase. I am speculating that it is net inflow of investments from the 2 casinos (integrated resorts). But there is also one other factor, Singapore resident growth (Singapore Citizens plus Permanent residents) has always been rather flat, but if we take a look at the Total population growth (total population is Singapore residents + foreigners on employment passes and working permits), the year where it shrinks, the M1 supply is negative. Subsequent years where Total population has accelerated (largely through foreign employment pass growth), the M1 supply has largely accelerated. There seems to be some correlation.
Between 2005 and 2007, there is a dip in M1 supply, this I speculate could be due to it's conversion into Non-liquid assets by Local Singaporeans PR (and an exit of capital from asset disposal), meaning during this time, this money could have gone into Properties and other asset classes which are non as liquid. (because M1 is a measure of liquid assets) By around 2007, the M1 money supply has continued to grow and accelerate. Around this time, the share market has tanked, property prices are showing slow down, and perhaps to an extend consequently, the M1 money supply continue to accelerate.
Adapted from data obtained from Singstat
If we look at the interest rates, it seems to track more closely to the GDP rates. Interbank rates are currently in the 1 to 2 % range. Previously when we see interest rate at this low is during the 2003 recession. This time, the interbank rates seemed to have tracked lower even before the GDP has reduced significantly with projections of GDP of 4 to 5%. This is also while inflation is at >8%. A strong possibility is that there is government intervention in the interbank 1 month, 3 month markets.
What this low interbank rate means is that it will be easier to support the cheap financing of properties and thereby reducing the number of distressed property owners dumping their units into the open market. The continue strong growth of the M1 money supply could perhaps be Casino's (IR) stand-by reserves which has not yet been converted to non-liquid assets or other capital investments.
Even if the M1 money growth rate is zero now, there is still some over S$70 billion in M1 supply. Not all of this currency is required for active transactional use. As long as this money doesn't flow outside of the country, it could still find it's way into non-liquid assets as long as there is a genuine demand.
Household formation in Singapore is about 25,000 a year. Nett immigration continues to be high, but may experience some slowdown due to the economic uncertainty.
With the onset of about over 30,000 units of private residential (non-landed) properties to be launched between now and 2011, with current stock levels at about 260,000 units at around 5.2% vacancy rate (URA) . By the time the total stock reaches 290,000 units, the demand would have more or less leveled. Historically vacancy rate stays at around 7%. By 2011, my guess is that vacancy rate will be around 7%, more or less at equilibrium. Any tightening will likely increase rental rates and any loosening will reduce it, although not all regions will experience the same impact as the supply in each region is not homogeneous.
So yes, USA is slowing down and will impact Singapore's GDP. But there is still ample M1 money supply in Singapore as well as a current property shortage.
My guess is that the prices will soften due to the drop in consumer confidence, leading to people hoarding money. While those with properties will hang-on to their properties largely helped by lower financing costs. Yes, I think the property prices will trend lower, perhaps easily by 20%, but I do not think it will be a doomsday prediction of 30 to 40% drop. And it will not be across the board.
As long as there is ample money supply with Supply-demand in equilibrium (Looks likely) and an improvement in business sentiment and outlook, you will suddenly see another rally. Singapore's case is not a case of lack of liquidity, but lack of confidence.
But don't expect that to be too soon. Maybe 1 to 3 years, it's anybody's guess.
http://paulhokangsang.blogspot.com
Where is Singapore's Private Property prices headed? In order to make accurate guesses, many variables must be used to gauge the past and therefore determine/guess the future.
Let us take a look at the Singapore's M1 Money Supply.
Chart adapted from Monetary Authority of Singapore MAS time-series data.
According to Investopedia, M1 money supply is, "A category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts.
This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency."
In order words, M1 is a measure of how much money is in circulation. And overly quick acceleration of M1 money supply could stoke inflation if the amount of goods and services do not match the pace of the increase in money supply.
Let's take a look at the Singapore Private Property Price Index.
(Source: Singstat.gov.sg)
There do not seem to be much correlation between M1 supply and Property prices. So let's move on to look at the growth rate of M1 money supply. But what explains the huge increase in M1 supply? M1 stimulates the GDP though it is debatable whether there is a lag and how long the lag is.
Chart adapted from Monetary Authority of Singapore time-series data.
By looking at the above chart, it seems that M1 more or less track GDP, except that there is a run-away increase in M1. I am not quite sure what is the break-down or exact source of this increase. I am speculating that it is net inflow of investments from the 2 casinos (integrated resorts). But there is also one other factor, Singapore resident growth (Singapore Citizens plus Permanent residents) has always been rather flat, but if we take a look at the Total population growth (total population is Singapore residents + foreigners on employment passes and working permits), the year where it shrinks, the M1 supply is negative. Subsequent years where Total population has accelerated (largely through foreign employment pass growth), the M1 supply has largely accelerated. There seems to be some correlation.
Between 2005 and 2007, there is a dip in M1 supply, this I speculate could be due to it's conversion into Non-liquid assets by Local Singaporeans PR (and an exit of capital from asset disposal), meaning during this time, this money could have gone into Properties and other asset classes which are non as liquid. (because M1 is a measure of liquid assets) By around 2007, the M1 money supply has continued to grow and accelerate. Around this time, the share market has tanked, property prices are showing slow down, and perhaps to an extend consequently, the M1 money supply continue to accelerate.
Adapted from data obtained from Singstat
If we look at the interest rates, it seems to track more closely to the GDP rates. Interbank rates are currently in the 1 to 2 % range. Previously when we see interest rate at this low is during the 2003 recession. This time, the interbank rates seemed to have tracked lower even before the GDP has reduced significantly with projections of GDP of 4 to 5%. This is also while inflation is at >8%. A strong possibility is that there is government intervention in the interbank 1 month, 3 month markets.
What this low interbank rate means is that it will be easier to support the cheap financing of properties and thereby reducing the number of distressed property owners dumping their units into the open market. The continue strong growth of the M1 money supply could perhaps be Casino's (IR) stand-by reserves which has not yet been converted to non-liquid assets or other capital investments.
Even if the M1 money growth rate is zero now, there is still some over S$70 billion in M1 supply. Not all of this currency is required for active transactional use. As long as this money doesn't flow outside of the country, it could still find it's way into non-liquid assets as long as there is a genuine demand.
Household formation in Singapore is about 25,000 a year. Nett immigration continues to be high, but may experience some slowdown due to the economic uncertainty.
With the onset of about over 30,000 units of private residential (non-landed) properties to be launched between now and 2011, with current stock levels at about 260,000 units at around 5.2% vacancy rate (URA) . By the time the total stock reaches 290,000 units, the demand would have more or less leveled. Historically vacancy rate stays at around 7%. By 2011, my guess is that vacancy rate will be around 7%, more or less at equilibrium. Any tightening will likely increase rental rates and any loosening will reduce it, although not all regions will experience the same impact as the supply in each region is not homogeneous.
So yes, USA is slowing down and will impact Singapore's GDP. But there is still ample M1 money supply in Singapore as well as a current property shortage.
My guess is that the prices will soften due to the drop in consumer confidence, leading to people hoarding money. While those with properties will hang-on to their properties largely helped by lower financing costs. Yes, I think the property prices will trend lower, perhaps easily by 20%, but I do not think it will be a doomsday prediction of 30 to 40% drop. And it will not be across the board.
As long as there is ample money supply with Supply-demand in equilibrium (Looks likely) and an improvement in business sentiment and outlook, you will suddenly see another rally. Singapore's case is not a case of lack of liquidity, but lack of confidence.
But don't expect that to be too soon. Maybe 1 to 3 years, it's anybody's guess.
http://paulhokangsang.blogspot.com
WHY DOES SIBOR DROP WHEN INFLATION IS AT THE PEAK
quote: "Success is a thought process"
I have 1 question. Why is Sibor (Interbank borrowing rate) falling despite record inflation?
In Singapore, Sibor is set by the Association of Bankers (ABS). As this is a closed group, I can only surmise that the Sibor Rate is set after banks consult each other and after considering the amount of liquidity available.
In the US, the federal reserve set target interest rates to regulate the economy, But in Singapore, the Monetary Authority of Singapore regulate the foreign exchange against an undisclosed basket of currencies of it's biggest trading partners, in order to control Inflation.
However Interest rates are usually set by banks and the government has a say in the direction of the interest rates, though it is thought to be implicit.
SUCKING UP EXCESS LIQUIDITY: BUT TARGETED INDISCRIMINATELY AT POOR AND MIDDLE-INCOME
With M1 money supply at a historic high, CORE inflation is a natural by-product (housing, ERP, bus fares, SMRT increase, food prices, etc). Adding fuel to fire is the additional inflation caused directly by fuel and resources. So in a sadistic way, the Singapore government has to increase indirect taxes to suck up the liquidity. However the scary thing is, this M1 nett increase is not spread out equally, that means that the Government's indiscriminate and across the board increase hits the poor and the middle-income hardest.
Normally, you would expect that any government should increase the interest rates when inflation is high, so as to slow down economic activity. In Singapore's case, where we import many items, therefore keeping the currency strong reduces inflation.
FORWARD LOOKING: INFLATION TO SOFTEN???
Of late, the USD vs SGD has seen an increasing trend (meaning that USD is stronger vs SGD), this in fact is a devaluation of the Singapore Dollar vs USD (of course this is only versus 1 currency). But this could signify that the Singapore Government views inflation ahead as benign.
If you look at SIBOR, it has also come down dramatically to below 2% for 1 year Inter-bank rate. Surely this cannot be right in an Inflation year??? Usually SIBOR comes down when there is an impending or risk of recession and in any economy, there is a lag effect of at least 6 months or more.
POSSIBLE IMPACT
When the currency trend is established or expected to weaken, smart money is the first to leave the currency. On top of that SIBOR is set to be reduced, this means that some other money parked in Singapore money market may deem the reduced yield too low and leave Singapore in search of higher yield.
But on the other hand, lower SIBOR keeps housing financing affordable. Some property developments in areas such as District 9 and District 10 has up to 40% to 50% foreign ownership. If they are NOT all here to stay but instead buying for investment, lower SIBOR will keep these people from cashing out of the Singapore market (There will be trouble even if foreign owner drops by 10% as that would mean increased selling pressure in an already bearish market). It is highly unlikely that such investors (many from Indonesia, Malaysia, China, India, etc) will keep the money from the sales proceeds in Singapore currency given that their home country deposit interest rates are higher.
As long as property prices stay fairly stable or drop in an orderly manner and gradually, Singapore can ride out the economic trough.
PROGNOSIS
In other words, lowering SIBOR is a calculated gamble to stabilise the property market and ensure an orderly fall (governed by supply and demand) and not panic selling. Although there is a risk of flight of some foreign capital from Singapore, those are potentially lesser evil considering that the property sector is a big sector in Singapore.
Many economic and policy tools are already activated to mitigate the severity of the coming slow-down or recession. So sit tight...
http://paulhokangsang.blogspot.com
I have 1 question. Why is Sibor (Interbank borrowing rate) falling despite record inflation?
In Singapore, Sibor is set by the Association of Bankers (ABS). As this is a closed group, I can only surmise that the Sibor Rate is set after banks consult each other and after considering the amount of liquidity available.
In the US, the federal reserve set target interest rates to regulate the economy, But in Singapore, the Monetary Authority of Singapore regulate the foreign exchange against an undisclosed basket of currencies of it's biggest trading partners, in order to control Inflation.
However Interest rates are usually set by banks and the government has a say in the direction of the interest rates, though it is thought to be implicit.
SUCKING UP EXCESS LIQUIDITY: BUT TARGETED INDISCRIMINATELY AT POOR AND MIDDLE-INCOME
With M1 money supply at a historic high, CORE inflation is a natural by-product (housing, ERP, bus fares, SMRT increase, food prices, etc). Adding fuel to fire is the additional inflation caused directly by fuel and resources. So in a sadistic way, the Singapore government has to increase indirect taxes to suck up the liquidity. However the scary thing is, this M1 nett increase is not spread out equally, that means that the Government's indiscriminate and across the board increase hits the poor and the middle-income hardest.
Normally, you would expect that any government should increase the interest rates when inflation is high, so as to slow down economic activity. In Singapore's case, where we import many items, therefore keeping the currency strong reduces inflation.
FORWARD LOOKING: INFLATION TO SOFTEN???
Of late, the USD vs SGD has seen an increasing trend (meaning that USD is stronger vs SGD), this in fact is a devaluation of the Singapore Dollar vs USD (of course this is only versus 1 currency). But this could signify that the Singapore Government views inflation ahead as benign.
If you look at SIBOR, it has also come down dramatically to below 2% for 1 year Inter-bank rate. Surely this cannot be right in an Inflation year??? Usually SIBOR comes down when there is an impending or risk of recession and in any economy, there is a lag effect of at least 6 months or more.
POSSIBLE IMPACT
When the currency trend is established or expected to weaken, smart money is the first to leave the currency. On top of that SIBOR is set to be reduced, this means that some other money parked in Singapore money market may deem the reduced yield too low and leave Singapore in search of higher yield.
But on the other hand, lower SIBOR keeps housing financing affordable. Some property developments in areas such as District 9 and District 10 has up to 40% to 50% foreign ownership. If they are NOT all here to stay but instead buying for investment, lower SIBOR will keep these people from cashing out of the Singapore market (There will be trouble even if foreign owner drops by 10% as that would mean increased selling pressure in an already bearish market). It is highly unlikely that such investors (many from Indonesia, Malaysia, China, India, etc) will keep the money from the sales proceeds in Singapore currency given that their home country deposit interest rates are higher.
As long as property prices stay fairly stable or drop in an orderly manner and gradually, Singapore can ride out the economic trough.
PROGNOSIS
In other words, lowering SIBOR is a calculated gamble to stabilise the property market and ensure an orderly fall (governed by supply and demand) and not panic selling. Although there is a risk of flight of some foreign capital from Singapore, those are potentially lesser evil considering that the property sector is a big sector in Singapore.
Many economic and policy tools are already activated to mitigate the severity of the coming slow-down or recession. So sit tight...
http://paulhokangsang.blogspot.com
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