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Are you planning to purchase a private residential property or HDB flat in Singapore? You may want to consider housing loan packages to finance your property purchase.
A mortgage is a home loan that is used for either the purchase or maintenance of the real estate. The borrower and lender agree on an amount to pay over a period. Payments will be divided into principal and interest. The borrower would also need to put down a property to serve as collateral to secure a loan. However, home loans aren’t as straightforward as there are many kinds to choose from.
In this article, we will be discussing the different types of housing mortgage packages available in Singapore.
Fixed-rate mortgages are home loan plans that are fixed throughout a certain period. This is typically over 1 to 3 years. Currently, the 2-year fixed rate home loan hovers between 1.40% to 1.60% depending on the respective bank promotions.
The pros to having a fixed rate package are the interest rate certainty. Your monthly installment rate is fixed and will not be swayed by the interest rate hike. However, it does give you less flexibility in partial or full redemption of your mortgage. This is because you will be locked in for the tenor that your interest rates are fixed. It’s also important to note that some banks may include a penalty waiver benefit. This normally applies when the redemption is due to the sale of the residential property.
SIBOR stands for the Singapore Interbank Borrowing Offer Rate. It is an interbank borrowing rate that practices transparency. Consumers have access to information like the interbank market interest rate and the interbank cost of borrowing. These rates are publicly available in Business Times and Teletext.
SIBOR comes in tenor terms of 1-month, 3-month, 6-month, and 12-month. And most banks in Singapore offer home loans or commercial industrial mortgages in tenor terms of 1-month or 3-month. However, bear in mind that the interest rate is higher for longer-term tenors.
The rate for 1M SIBOR has hovered around 0.300% throughout 2021.
Singapore banks have gradually do away with home loans pegged to SIBOR since 2021 due to the low interest rate environment.
6M SIBOR will be discontinued effective from 1 April 2022. Whereas 1M and 3M SIBOR will be discontinued in 2023 or 2024 in order to provide sufficient time for the transition of existing customers on SIBOR contracts.
The Association of Banks in Singapore (“ABS”), the Singapore Foreign Exchange Market Committee (“SFEMC”), and the Steering Committee for SOR Transition to SORA (“SC-STS”) issued a consultation report (“Report”), titled SIBOR Reform and the Future Landscape of SGD Interest Rate Benchmarks and it recommends the Singapore Overnight Rate Average (“SORA”) as the main interest rate benchmark for SGD financial markets.
SORA is an interest rate benchmark based on the average rate of unsecured overnight interbank SGD transactions brokered in Singapore. Administered by MAS, SORA is underpinned by a deep and liquid overnight funding market, and is commonly monitored by money market participants as a reflection of daily conditions in SGD money markets.
The Swap Offer Rate (SOR) pegged mortgage is a US dollar funding mechanism. This mortgage type swaps SGD funds for USD dollar fundings at a certain cost depending on the tenor (1-month, 3-month, 6-month, or 12-month).
Note that the final aggregate mortgage rate will depend on the bank margin.
However, SOR will no longer be available after 30 June 2023 due to the cessation of USD London Interbank Offered Rate (LIBOR),
All SOR based home loan will be switched to SORA Mortgage Package in 3Q 2022.
SORA, (Singapore Overnight Rate Average) has been recommended as the alternative interest rate benchmark to SOR by the Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Market Committee.
SORA is an interest rate benchmark based on the average rate of unsecured overnight interbank SGD transactions brokered in Singapore between 8am and 6.15pm. Administered by MAS, SORA is underpinned by a deep and liquid overnight funding market, and is commonly monitored by money market participants as a reflection of daily conditions in SGD money markets.
This mortgage plan requires you to set up a deposit account with a deposit interest rate equivalent to your home loan financing cost. The interest offset can typically go up to 70% of the financing cost. Do you have spare liquidity and flexibility for cash flow? Then this mortgage package is the better option as it also offers a great value proposition.
This mortgage package is usually offered by the statutory Housing & Development Board. HDB housing loan interest rates can go up to 2.6%. However, with this package, you can expect financing of up to 90% of the flat value. There is also an HDB bank housing loan option that offers competitive rates. This, however, is subject to prevailing market interest rates. With the HDB housing loan, you can also choose to refinance or mortgage your property to enjoy more competitive rates.
This references home loan rates to the bank’s monthly savings to the bank’s fixed deposit interest rate. Because it’s the bank’s savings fixed deposit rate, every bank may refer to this mortgage type differently. For example, FHR, FDMR, FDPR, & FDR.
This mortgage package has grown in popularity over recent years. This is due to SIBOR's sharp rise in its interest rate. Previously, SIBOR’s interest rate was 0.4%. Now, it is around 1%. In comparison, the Fixed Deposit Pegged mortgage has lower volatility than SIBOR.
The final aggregate mortgage rate is calculated with the bank margin spread above the prevailing FD Pegged reference rate.
Mortgage loans typically consist of principal with interest. However, a Partial Principal Repayment Mortgage usually includes 50% of the original normal principal with interest. This helps reduce the borrower’s monthly loan repayment which improves cash flow.
