TWO key interest rates that determine how much your home loan costs are near their all-time lows but borrowers taking out new mortgages may not be better off.
Borrowers usually benefit when these measures drop but this time banks are responding to the riskier economic climate and surging property market by charging more for loans.
The most well-known of these measures – the three-month Singapore Interbank Offered Rate, or Sibor – fell below 0.6 per cent on Tuesday. This brought it near the all-time low of 0.56 per cent struck in June 2003.
Another popular benchmark rate – the Singapore dollar Swap Offer Rate (SOR) – hit 0.307 per cent last Thursday. This was the lowest level in at least a decade, according to Bloomberg data.
The rates, already low as they track prevailing United States rates, which are at rock bottom, fell further last week after the Singdollar rose.
Borrowers can take out mortgages pegged to these measures but those who expect these loans will follow the two rates down will be disappointed. Some banks have upped the spreads that they charge above Sibor and SOR, making loans linked to the rates more expensive.
‘Property prices have gone up to previous highs and the risk of financing a property has gone up, so banks are pricing this risk into their margins,’ said a consumer banker.
At DBS Bank, a home buyer taking a loan of 80 per cent of his property’s value around March would have paid a rate of Sibor plus 0.5 percentage points for the first year and Sibor plus 0.75 percentage points for the second.
A buyer opting for this DBS package now will have to pay Sibor plus 1 percentage point for the first two years.
Standard Chartered Bank has also revised spreads for its three-month Sibor-pegged loan. It is now charging Sibor plus 1.25 percentage points, compared with 1 percentage point in March.
Loans pegged to the SOR have also been hit by the increasing spreads.
For example, the margins for OCBC Bank’s two-year packages linked to the SOR have shot up from March to April, with a rise of 0.25 percentage points for its one- and two-year packages.
The higher spreads will affect a growing number of borrowers as Sibor-linked loans have become increasingly popular since their launch about three years ago.
Mr Dennis Ng, spokesman for www.HousingLoanSG.com – a mortgage consultancy portal – said lenders on the new DBS package will fork out more each month than those on the older deal. Mr Ng calculated that borrowing $500,000 over 20 years at a constant Sibor rate of 0.7 per cent will cost $115 more in monthly instalments during the first year, and $58 a month more in the second.
Sibor is very low now as it tracks the US Federal Reserve Fed funds target rate, which is near zero.
SOR comprises the bank’s prevailing lending costs plus Sibor.
Both Sibor and SOR, both already low, dropped over the last week after the Monetary Authority of Singapore tightened the Singapore dollar. The appreciation of the Singdollar is likely to attract capital inflows, which means banks have plenty of cash to lend.
‘When you have excess liquidity, this will typically drive down short-term interest rates,’ said OCBC economist Selena Ling.
With higher interest rates expected in the later part of this year, home buyers opting for floating rate packages such as Sibor-pegged mortgages could end up paying more – assuming bank loan spreads do not change.
‘I think Sibor will likely creep slightly higher in a fairly gradual and incremental fashion from current levels towards the 0.8 per cent to 1 per cent range in the second half of this year,’ Ms Ling added.
The increasing spreads that banks charge above Sibor and SOR are unlikely to affect the property market for now at least, say real estate experts.
‘The perceived returns and profits from investing in property are still higher and can justify the interest rate,’ said Mr Nicholas Mak, real estate lecturer at Ngee Ann Polytechnic.
DBS said it offers competitively-priced deals with different features. StanChart and OCBC said their rates were reviewed periodically so that they moved in line with the industry, the general interest rate environment and business considerations.
Other banks including UOB, Citi, Maybank, HSBC, and Hong Leong Finance did not comment on whether any changes would be made to their interest rates in the future.
Source: Straits Times, 22 Apr 2010