Higher repayments ahead for home loans

Singapore

THE recent surge in interest rates is going to bite home buyers who are facing an increase in monthly instalments which could run into hundreds of dollars.

And that will rub salt further into the wound for those with investment properties, as rentals are dropping like ten pins. The Urban Redevelopment Authority's overall private residential rental index in the second quarter of 2015 was down 2.7 per cent from Q4 2014.

Especially miserable are likely to be borrowers whose loan packages are pegged to the swap offer rate (SOR), given the 50 per cent jump in the 3-month SOR last month.

Home loan borrowers who took out a package based on the 3-month SOR should have gotten letters telling them they need to adjust their instalment amounts, said Tok Geok Peng, DBS Bank executive director of secured lending.

Based on a 20-year S$1 million loan, the extra amount they need to cough up a month is S$340.83, she said.

The 3-month SOR jumped to 1.405 per cent on Aug 28, up 0.409 per cent from 0.996 on July 31. As an indication of the volatility of the rate, it rose further to 1.564 per cent on Sept 8 but has since plunged to 1.284 per cent on Friday.

DBS has less than 500 SOR-based accounts, said Ms Tok. "We told (customers) SOR is not really a good benchmark because in the long run SOR tends to be more volatile," she said.

OCBC Bank said it has borrowers enquiring about switching to other pricing packages on a routine basis. A Citibank spokeswoman said the bank has seen an increase in customers who are considering options to switch to either fixed rate loans or to longer-term Sibor indices of six to 12 months.

The SOR is used more commonly to price commercial loans. SOR takes into account the expected forward exchange rate between the US dollar and Singapore dollar and thus could be affected by external factors such as the USD interest rate.

The typical home loan is based on the more stable 3-month Sibor or Singapore interbank offered rate but SOR-based loans became more popular when they dropped below Sibor. Sibor is generally determined by the demand and supply of funds in the Singapore interbank market.

"Around 2010-2011, when SOR started to dip below Sibor, some banks started to use SOR as a benchmark for their home loans which gave the borrower a lower loan rate," said Ms Tok.

"This resulted in SOR becoming more volatile because exchange rates as well as USD money market rates tend to fluctuate more," she said.

Sibor-pegged borrowers are not spared though the 3-month Sibor has risen more slowly; it was 1.139 per cent on Friday, up from 0.8788 per cent on July 31 or about 30 per cent higher.

DBS is offering borrowers spooked by the rising interest rates several refinancing options: fixed deposit home loan rate (FHR), fixed rate or managed mortgage package.

The FHR launched in April 2014 is the most popular, accounting for eight out of 10 new bookings for the last three months, said Ms Tok.

The FHR package offers borrowers transparency as their home loan rate is based on simple average of 12- and 24-months SGD fixed deposit rates offered by DBS.

Any increase in FHR means that the fixed deposit rates must increase.

Being the biggest bank in South-east Asia, DBS tends not to raise deposit rates quickly as it has more deposits that it can deploy.

The FHR rate of 0.4 per cent has remained unchanged since April 2014. Including a 1.4 per cent premium, the effective rate is 1.80 per cent.

As for those who prefer fixed rate packages, DBS has two- and three-year fixed rate options. The two-year package charges 1.98 per cent for both the first and second year, while the three-year option charges 2.18 per cent for each year.

For borrowers who worry about future increases in interest rates but want to enjoy the current low interest rate, they can consider the managed mortgage, she said. This special feature lets the borrower split the loan between a fixed rate and a floating rate package.