Owning your dream home comes with a great feeling of accomplishment and pride. Owning a home is no mean feat and is the lifelong goal for many. But owning a home comes with a lot of financial responsibility. Unless you were lucky enough to win the lottery or be born with a golden spoon, chances of you having enough money to purchase your home right off the bat is very, very slim.
Most people opt for a home loan to achieve their goals. Based on their budget, their chosen property and a myriad of other factors, they have their application approved and the amount disbursed for them to make their purchase.
Read more: What to do if your home loan gets rejected
Having your loan approved was actually the easy part. The real test is making those monthly instalments year on end before you can breathe a sigh of relief. Unfortunately, meeting the instalments is harder than you think, especially if your SIBOR begins to climb.
Before we get to the technicalities of what you should do, let’s take a closer look at what SIBOR is and how it works.
SIBOR stands for Singapore Interbank Offered Rate and is overseen by ABS or Association of Banks in Singapore. This rate is the interest rate levied by banks when they lend huge sums of money to other banks. But banks don’t lend money to each other in the same way they lend to their customers. When a bank borrows money from another bank, the lending bank deposits a sum of money in the borrowing bank and earns a deposit rate. These rates are usually for tenures ranging from 1 month, 3 months, 6 months and 1 year.
Now that we know what it stands for, let’s see how it affects your home loan.
Most home loans offered are pegged to your SIBOR rates. Therefore an increase in the SIBOR will result in an increase in the interest of your loan which means your monthly instalments start increasing g and if you’re strapped for cash as is, increases in SIBOR can make your affordable instalment not so affordable.
While SIBOR tends to change on a daily basis, the value at which it stands on the first business day of the month is usually tied to the remainder of the month. Most home loan packages are either tied to a 3 month SIBOR or a 1 month SIBOR. So you’re home loan interest should look somewhat like this.
3 month SIBOR + 0.8%
Let us assume the 3 month SIBOR stands at 0.7%, the 0.8% is a spread that banks charge as a premium and varies from bank to bank (in this case, the particular bank is offering a spread of 0.8%). The total interest you’d be paying would be 1.5%.
SIBOR is tied to the market conditions in and around the region of Singapore but major global events can affect this. One such event is the US Federal Fund Rates announcing intentions to increase their interest rates. These rates have remained almost unchanged in the past 7 years but when it does increase, you can bet your SIBOR will increase too. It may not be a whopping amount but it will definitely elevate your interest rate and your instalment to a new level
What can you do?
The best option in this scenario would be to go in for refinancing. This basically means you shifting your loan from one bank to another that offers lower interest rates.
Refinancing comes in two forms, with one offering a fixed rate of interest for a particular tenure after which it shifts to a floating rate and the second option being a floating rate right off the bat.
There is also a third option of going in for board rates. Board rates however are determined by the banks and are not the most transparent. Banks retain the right to change these at their discretion which makes them not so trustworthy.
Regardless of which option you chose, here are a few things you should look for
- Duration of the lock-in period: Refinancing comes with a lock-in period which means once you change banks, you can’t change again for a specified duration. Most lock-in periods last for a few years.
- Fixed Rates are not exactly fixed: Fixed rate refinancing is more expensive than floating rates as they offer the added security of not changing for a few years. The key point here is a few years. Fixed rate packages turn over into floating rate packages after the first 2 or 3 years.
- Look out for the fine print: Before you opt for a refinancing, look at what the fees and charges associated with it are. Legal fees, a valuation report and other miscellaneous charges can start piling up, especially when you compare it to how much you think you can save. Look for packages that offer legal subsidies.
Opting for a home loan refinancing is a great way to stay ahead of increases in interest rates. But remember that the process is a long one considering the time taken for processing and the fact that you may have a notice period to serve at your current bank. One can expect a wait time of up to 3 months.