What is SIBOR rate? How does that compare to Fixed Deposit Home Rate (FHR) loans? Here’s a summary to help you compare between housing loans in Singapore and decide which is better.
There are two main types of home loans in the Singapore market today. The first are pegged to the Singapore Interbank Offered Rate (SIBOR), whereas the second – a relative newcomer to the home loans market – is the Fixed Deposit Home Rate (FHR). Which of the two should you choose? Here’s a rundown on how to pick:
First, You Should Understand How SIBOR and FHR Loans Work
The SIBOR rate indicates the general interest rate in Singapore, after a comparison of rates between at least 12 banks (this process is regulated by the Monetary Authority of Singapore).
The SIBOR rate is expressed as 1M SIBOR, 3M SIBOR, 6M SIBOR, etc. The number in the front indicates the interest rate period, at which your loan rate is revised to match SIBOR.
For example, if your loan rate is based on 3M SIBOR, then your home loan interest will be revised to match SIBOR every three months. If it is pegged to 1M SIBOR, then it is revised to match SIBOR every month (which probably means your home loan interest will change from month to month).
In general, the longer the interest rate period, the higher the rate will be. You are, in effect, paying for the benefit of a more consistent rate.
Now a SIBOR home loan consists of two parts: the bank’s spread, plus the SIBOR rate. For example, a SIBOR rate package could have a rate of:
0.76% + 3M SIBOR
This means the interest rate is 0.76% (the bank’s spread), plus the 3M SIBOR rate. If the 3M SIBOR rate is 0.86 per cent, the above quoted rate would be 0.76% + 0.86% = 1.62%.
Next, Let’s Look at the FHR Rate
The FHR rate is a form of board rate, or Internal Board Rate (IBR). This simply means that the rate is fixed by the bank, instead of by external market conditions. The FHR rate pegs your home loan to the bank’s fixed deposit rates.
FHR rates also have a number next to them, most commonly FHR9 and FHR18. Again, this refers to the interest rate period – it refers to the nine-month fixed deposit rate (FHR9), or the 18-month fixed deposit rate (FHR18).
As with SIBOR, the rate is the bank’s spread, plus the FHR rate. The only difference is that the rate is pegged to fixed deposit rates instead of SIBOR rates.
Which is Better?
SIBOR is more volatile than FHR. That is, SIBOR rates move up or down in bigger increments – and more often – when compared to fixed deposit rates.
For example, the 3M SIBOR rate is quite often at the three per cent mark, if you measure it over a long span such as 20 years (although in the past decade, it has been unusually since 2008 due to the Global Financial Crisis).
However, there have been periods such as in 1990 or 1998, when the 3M SIBOR rate shot up to almost eight per cent. Also, SIBOR rates fluctuate much more. A bank’s fixed deposit rate may not change for quite a long time, but SIBOR rates can move up or down very quickly in the space of a few days or weeks.
Besides volatility, there is one more factor to consider: banks have more control over fixed deposit rates (although these are ultimately regulated by the Monetary Authority of Singapore).
No bank can really “control” SIBOR rates – the bank can raise or lower their spread, but the actual SIBOR rates are still derived from at least 12 banks – it is the free market that sets the rate.
With FHR rates however, a bank has more control. Overall, a bank is inclined to keep fixed deposit rates low, because the higher the fixed deposit rates the more interest the bank must pay. For this reason, FHR rates tend to move very little, as compared to their SIBOR counterparts.
In Conclusion, FHR Rates Are Better If You like to Play It Safe
The main advantage of SIBOR loans is that, when they fall, they can fall much faster than their FHR counterparts. Borrowers who choose to brave SIBOR rates can save much more, when SIBOR rates start to plummet. Borrowers with FHR rates, however, are unlikely to experience this type of windfall.
On the other hand, SIBOR rates are quicker to rise as well, thus potentially costing their borrowers much more. FHR rates rise less frequently, and in smaller increments – their borrowers are spared the shock of suddenly skyrocketing interest rates.
Overall, borrowers who need predictability in loan repayments (e.g. those who pay their home loan with cash instead of CPF) are better off with FHR loans. Borrowers who aren’t put off by fluctuating rates might want to take their chances with SIBOR.
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