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Showing posts with label sor. Show all posts
Showing posts with label sor. Show all posts
Wednesday, April 3, 2013
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.
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