Ravi Chandran
The rise of the fixed home loan rates is the second increase in fixed home loan interest rates in less than two months.
DBS, OCBC and UOB raised their fixed home loan interest rates on Nov 15, with rates reaching up to 4.5 per cent.
DBS, Singapore’s largest lender, has four fixed rate packages available, ranging from two years to five years. All four are set at 4.25 per cent per year.
OCBC one-year and two-year fixed rate packages are now set at 4.3 per cent per year, up from 3.35 per cent and 3.5 per cent respectively.
UOB’s two-year fixed home loan rates are now set at 4.5 per cent per year, which is at almost historic highs for home loans.
Paul Ho, chief officer at iCompareLoan, said: “Many customers may be choosing fixed home loan rates in this environment because they are anticipating further rate hikes in the United States.”
“This is why some banks are offering longer tenure loans of three to five years,” he added.
“Although choosing to lock in fixed rates for a longer period of time may give some home loan seekers better peace of mind, it may not be the best home loan solution for all people who need mortgage loans”
Mr Ho
As the name implies, fixed-rate home loan are mortgages with an interest rate (and payment) that remains the same over time. With the fixed-rate home loan, you pay the same amount every month for the entire life of the loan, generally 1 to 5 years. There are currently no lenders that offer a perpetual fixed-rate home loan for the entire tenure.
In the beginning, the portion of your monthly payment going toward interest will be high, and the portion going toward principal payment will be low. The interest portion of the monthly payment tapers off over the term and the principal portion rises to compensate, but the total payment amount does not vary.
Payments over the total term of a floating rate mortgage for your new home purchase will vary by design.
The interest rate usually starts off low (thus the attraction), but it can later rise. If you opt for an floating rate, you will pay a fixed interest rate for a predetermined time period (usually three years or less), followed by periodic rate adjustments for the remainder of your loan’s term.
This rate is normally a set number of points over a widely published rate, such as the Singapore Interbank Offered Rate (Sibor) or Singapore overnight rate average (SORA). If that rate rises (or falls), so do your monthly payments.
SORA is computed from the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singdollar cash market.
The three-month compounded SORA, a benchmark that is used by banks to price floating home loans, has almost tripled from 0.32 per cent in May to about 0.98 per cent earlier this month. The current three-month compounded Sora is now at 2.6633 per cent,
If you were previously tied to a SIBOR-linked home loan package, the banks will gradually convert it into SORA ones in the coming few years. This is because SIBOR is currently being phased out. The 6-month SIBOR was discontinued on 31 March 2022. The more commonly used 1-month and 3-month SIBOR is due to stop after 31 December 2024.
Fixed home loan rates could be what consumers who want no surprises, may be looking for as a best home loan solution. Your initial payment on the home equals your final payment. For many borrowers, this provides peace of mind in an unpredictable economy. It also is a good strategy for new home purchase when rates are low but likely to rise.
On the flip side, the interest rate on fixed-rate mortgages is typically higher than an floating rate’s initial interest rate. If you expect to move or trade up in a few years, this means you will pay more than necessary for a short-term investment — money that you could have invested elsewhere or saved. You also would pay more over the long term if interest rates stayed low for an extended period or fell; though in the latter case, you could refinance.
Fixed rate package are almost always more expensive than floating rate packages.
As banks are unsure of the future interest rate environment, they will need to enter into hedging contracts, which incur a fee, to guarantee you the future rates. It’s like buying an insurance policy against interest rates going crazy.
For example, if the current borrowing cost of the bank is 1.5%. The bank may then decide to create a fixed rate package that is 2% fixed for 3 years.
However, the bank does not know what will happen in year 2 and year 3. What if the cost of borrowing for the bank rises to 3% for year 2 and 3?
This would mean that the bank’s profit would be: –
- Year 1 = 2% – 1.5% (cost of funds) = 0.5%
- Year 2 = 2% – 3% (cost of funds) = -1%
- Year 3 = 2% – 3% (cost of funds) = -1%
- Total over 3 years = -1.5%
A bank is unlikely to create a product that has a risk of losing money. So banks typically pay a fee to go into a hedging contract.
The bank will buy a hedging product that would guarantee them 2% for year 2 and year 3 and maybe pay a fee of maybe 0.3% to do so. It is similar to insurance.
Hence the bank’s profit would be: –
- Year 1 = 2% – 1.5% (cost of funds) = 0.5%
- Year 2 = 2% – 1.5% Cost of funds + 0.3% Hedging cost = 0.2%
- Year 3 = 2% – 1.5% Cost of funds + 0.3% Hedging cost = 0.2%
- Total (over 3 years) = 0.9%
A guaranteed profit for each mortgage loan product is probably more important for the bank than the potential to make more money, but also open to the possibility to lose money.
Choosing between a fixed-rate mortgage and floating rate mortgage for your new home purchase is really a matter of current rates, your personal investment horizon and the economy. In addition to deciding whether you want to risk a rate hike, you also have to consider how long you plan to own the home, differences in closing costs and whether you will meet the qualifications for each type of loan.
