Getting a home loan can be a pretty confusing with bankers throwing around financial jargon that can easily throw off most people. Today we at Easyrates will try to explain the different types of home loan interest rates and some of the common misunderstandings people have about them, so that you can better understand what you may be getting yourself into.
Fixed rates are perhaps the most commonly sought after and easily understood type of home loan interest rate. Basically the bank guarantees you a fixed interest rate for a set period of time, once this period of time is over, your interest rate changes from a fixed rate to a floating rate commonly based on SIBOR / SOR rates – that we’ll explain later.
Common misunderstandings about Fixed Rates
Perhaps the most common type of home loan rate available in Singapore. SIBOR/ SOR based home loan interest rates take a SIBOR/ SOR rate with a predetermined spread added in. These rates fluctuate on an almost daily basis and can move rather quickly upwards or downwards.
An example of how a SIBOR / SOR based home loan package is calculated:
A bank may quote you an interest rate of 3 Month SIBOR + 0.5% for the first 3 years.
Assuming the first years 3 Month Sibor rate is 1%, the second years is 1.5% and the 3rd years is 1.4%, the interest you’d pay is 1.5% on the first year, 2% on the second year and 1.9% on the third year.
What is SIBOR and SOR?
SIBOR is the Singapore Interbank Offer Rate and is the benchmark rate that banks use to borrow and lend money to each other
SOR is the Swap Offer Rate, think of SOR as the interest rate you would pay if you borrowed the same amount of money only you borrowed it in US dollars first and then converted it to Sing dollars. The SOR rate is largely impacted by US dollar movements, for example, if the US dollar strengthens from 1.39 SGD/ 1 USD to 1.41 SGD / 1 USD, the SOR rate would also increase.
Common misunderstandings about SIBOR/ SOR Rates
Over the past few years Fixed Deposit Based Home Loan rates have been increasingly gaining popularity. A fixed deposit rate based home loan is when the bank charges you the fixed deposit interest rate + a spread on your home loan.
This has been gaining popularity as they tend to be one of the more stable options. Though there is no guarantee that Fixed Deposit Rates will not shift, there are quite a few banks where these rates have stayed static for 4 – 5 years. Another reason why Fixed Deposit Based Home Loan Rates have proven popular is that in order for banks to increase their Fixed Deposit Rates, they would have to increase the amount of interest they pay to their customers as well.
An example of this would be when Bank A sells you a home loan package based on their 48 month fixed deposit (Under $20,000) rate + a spread of 0.70%.
Assuming the first years 3 Month 48 month fixed deposit (Under $20,000) rate is 1%, the second years is 1% and the 3rd years is 1.2%, the interest you’d pay is 1.7% on the first year, 1.7% on the second year and 1.9% on the third year.
Common misunderstandings about Fixed Deposit Based home loan Rates
Board Rate based home loan packages are less common these days, so don’t expect to see too many of these in the market. Board Rate based home loan packages are basically home loan packages where the interest is based on a board rate less a predetermined spread. For example Board Rate – 0.7%.
So Why Are Board Rates Unpopular? Getting a Board Rate based home loan is pretty risky, as Board Rates are internally set interest rates. Which is to say that the bank that provides the loan sets the Board Rate by itself without any external control or oversight, making this one of the most risky types of rates available.
We hope that this article has helped you understand a little bit more about the different type of home loan interest rates available in the market. Like what we wrote? Share us on Facebook! Feel we left out some useful information? Drop us a comment below! Need help with rates? Drop us an email at [email protected] and we’ll be more than happy to help you!