Marissa Lee

Home owners were caught by sur-prise last week when a key interestrate benchmark suddenly shot upafter years of slumber.

It was a reality check for manyand a sign of things to come as theera of cheap money begins to drawto a close.

Not that we are at sky-high ratesyet or even that we are headingthat way, but the trend is up.

The Singapore Interbank Of-fered Rate (Sibor), a key rate used toprice most home loans, went upfrom 0.457 per cent a week ago toas high as 0.639 per cent.

The three-month Sibor hadbeen limping along the 0.4 per centmark since late 2010 as the UnitedStates kept short-term interest rates– to which the Sibor is highly corre-lated – low to get money flowing inits economy.

Now volatility in the global mar-kets has reduced liquidity, andgone are the days when any day

was a good day to refinance yourhome loan.

The Sibor’s climb signals tighterlending conditions to come, warnsMr Kumar Rachapudi, senior ratesstrategist at ANZ Asia.

The Sibor is fixed daily by the As-sociation of Banks in Singaporebased on quotes from banks onwhat they expect to pay for inter-bank loans that day. In short, it is af-fected by liquidity in the bankingsector.

“Bank deposit growth has beensluggish relative to loan growth,”says Mr Rachapudi, noting that lastNovember, bank loans grew 7.5 percent from the same month a yearago, whereas bank deposits rose a

meagre 2 per cent. “This has takenthe loan-to-deposit ratio for Singa-pore banks to 111 per cent and isgetting reflected in tight mon-ey-market conditions.”

Mr Rachapudi adds that he ex-pects liquidity to stay tight in thenear term, as accumulating depos-its and reducing bank loans hap-pen only slowly.

The consensus is that we are en-tering a new era of rising interestrates. Credit Suisse tips thethree-month Sibor to rise to 0.8 percent by the end of the year whileUnited Overseas Bank (UOB) tips 1per cent.

Continued on >>Page 28

Should you switch to afixed-rate package?Here are somepoints to take note of

What to do abouthome loan asinterest rates rise

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27investJanuary 11, 2015 thesundaytimes

“We had expected the bullishmove in the SOR and Sibor sincelast year,” says UOB economistFrancis Tan.

“If the euro zone announcesfull-fledged quantitative easing, wewill see an even stronger US dollaragainst the Singdollar, and the Si-bor will move even higher.”

But Barclays economist LeongWai Ho believes the Sibor’s spikewill fade when the “bout of curren-cy weaknesses and general risk aver-sion start to normalise”.

The three-month Swap OfferRate (SOR) – another key interestrate that is determined by marketsrather than fixed by banks andmore responsive to the state of theUS economy – fell last Wednesdayfrom the peaks recorded earlier.

“If the drop continues in thecoming days, Sibor should start re-tracing as well,” says Mr Leong.

Nevertheless, analysts agree thatthe Sibor will not be retreating toofar back any time soon.

The market expects the US Feder-al Reserve to start raising rates inJune, signalling that the party isover.

This sounds like a lot of doomand gloom but take a step back andyou will see that the sub-1 per centSibor that home owners and proper-ty speculators have enjoyed overthe past six years was more of an ex-ception than the rule.

In fact, if you go back to beforethe 2008 financial crisis, a Sibor of3.5 per cent was quite the norm.

As Credit Suisse economistMichael Wan puts it: “Low ratesover the past few years were anoma-lous, driven by extremely loosemonetary policy by major centralbanks around the world. This jumpshouldn’t be a surprise – at currentrates, Sibor is still at very low lev-els.”

While we know where the Siboris headed, what we really want toknow is whether refinancing ahome loan amid rising interest

rates can still save money.Conventional wisdom has it

that you should review your loanpackage every two to three years, orbefore the promotional periodends and your bank raises its premi-um on the interest you pay, whichincreases your monthly instal-ments.

Mortgage advisers report that avolatile Sibor and SOR have sentmore Sibor-pegged home owners tothem inquiring about a switch to afixed-rate loan, but the choice ishardly that binary.

Here are a few things to watchout for when picking a loan pack-age.

Thereafter rates

Most fixed-rate loans stay fixed fortwo to three years so you get somebudgeting certainty. But after that,like any other package, higher“thereafter rates” kick in.

“The thereafter rate may be avery high board rate or a Sibor ratethat has a very high spread,” saysMr Vinod Nair, chief executive ofpersonal finance comparison site,MoneySmart.sg

“This puts you in a situationwhere you would have to considerrefinancing again in another threeto four years, when rates may haveincreased further.”

If you want to save yourself thehassle of refinancing your loan eve-ry three years, lock in a low thereaf-ter rate.

Prepayment penalties

If interest rates go up at a crazypace and you have some moneyjust sitting around, it makes sensefor you to pay down as much ofyour loan quantum as you can.

That is, unless your bank impos-es a penalty on early payments orprepayments.

Some banks like OCBC allow“flexible customisation of instal-ment payments to ease cash flowon a case-by-case basis”.

The bespoke home loan

Banks offer a wide array of mortgag-es, from fixed-rate loans to variablerates (pegged to Sibor or SOR), tohybrids.

DBS lets clients allocate theirloan between fixed-rate and float-ing-rate packages to hedge theirbets, while Citibank customers getunlimited switches on their Si-bor-linked loan to the one-, three-,six- or 12-month Sibor, whichcould be useful if interest rates riseor fall.

But perhaps the biggest act ofcustomisation banks exercise isprice discrimination, where differ-ent customers get different ratesbased on their credit profiles or rela-tionship with the bank.

“Home loan packages and inter-est rates vary according to thedepth of the customers’ relation-ships with Citibank, among otherfactors,” says Mr Peng Chun Hsien,head of secured finance and e-busi-ness at Citibank Singapore.

But the catch is that unlike Siborand SOR, these factors are qualita-tive, and thus negotiable. If youthreaten to refinance to a more af-fordable package with a differentbank, your bank might well showyou some options for a repricing – aswitch to a different package, butwith the same bank.

Know your options

In the competitive home-loan fi-nancing sector, it’s not unlikely eve-ry now and then for a bank to rollout some sweet deals or teaser ratesto gain market share.

“In fact, in a dynamic environ-ment, all packages are subject tochanges,” says Mr Sean Lim, found-er of FindAHomeLoan.co

Even for fixed-rate loans, bankscan change their offerings everythree to six months, sometimeseven quarterly, say mortgage advis-ers.

That said, as interest rates are setto rise, you should not try to timethe market for promotions, says Mr

Lim. But there is no harm looking,and since you are required to giveyour bank advance notice if you in-tend to reprice or refinance yourloan, you could make some inquir-ies while you are at it.

Think long-term

Tempting as it may be to switchloan packages based on upswings

and downswingsin interest rates, a housing loan isa long-term commitment of 15 to20 years, says Mr Alfred Chia, chief

executive of financial advisory firmSingCapital, which specialises inmortgage refinancing.

“You can’t make a decisionbased on the short term – the sav-ings may be only temporary.”

For this rea-

son, Mr Chia advises

homeowners who are on the Hous-

ing Board’s concessionary loan

plan with an interest rate of 2.6 per

cent to stay put, as it is probably

one of the cheapest financing op-

tions available.

marilee@sph.com.sg

From >>Page 27

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1

0.8

0.6

0.4

0.2

0

-0.2

-0.4

-0.6

-0.8

Sibor and SOR (%)

Jan 90.6392%

Jan 80.76029%

ST GRAPHICS

SOURCE: Bloomberg

2011 2012 2013 2014 2015

Sibor SOR

Think long-termwhen picking loan

[ me and my money ]

28 investthesundaytimes January 11, 2015

29investJanuary 11, 2015 thesundaytimes