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Home owners may want to lock in longer-term interest rate to avoid any volatility ahead, say experts

For the few home buyers out there looking at taking up a new loan or those who want to consider refinancing their home loans, the outlook is more uncertain than before.

The key question that they have is this: How will interest rates move?

It’s a crucial question because of two reasons.

First, many home loans these days are pegged to interbank rates, which are ‘wholesale’ lending rates that banks charge one another and move with the market.

In a market like London, the short-term interbank rate (known as ‘Libor’) has shot up because a lack of confidence is making banks wary of parting with their money.

In Singapore, the Singapore Interbank Offered Rate (Sibor) spiked at the onset of the current financial crisis. It has fallen back since, but how will it behave from here on?

When Sibor goes down, consumers will benefit from a loan offering a rate pegged to Sibor as they will be paying a lower interest rate. But if it heads up, their mortgage instalments go up.

The second reason for new borrowers or refinancers wanting to know how rates will change is that they are typically faced with a choice of three main strategies.

They can opt for:

a variable-rate loan that uses a short-term interest rate like the three-month Sibor;

a variable-rate loan based on a longer-term rate like the 12-month Sibor (which is higher); or

a fixed-rate loan that locks in the interest rate for the first few years, which is the most expensive option.

In general, home loans pegged to publicly available rates like Sibor offer transparency, but home owners are at the mercy of market conditions. This is why fixed-rate packages are priced at a premium.

To figure out what borrowers should best do, we asked the experts.

Unsurprisingly, they say that home owners may generally want to think about locking in a longer-term interest rate now if they want to avoid any volatility ahead.

And we could be in for a very bumpy ride. Last Friday, fresh data showed that Singapore entered into a technical recession in the third quarter, and the Monetary Authority of Singapore eased its monetary policy, switching to a neutral exchange rate policy.

As the financial crisis deepens, global markets have been falling and credit has seized up, resulting in sky-high borrowing rates in many countries.

Central banks in the United States, Europe and Asia are pumping money into the system to cool rates and recently even cut rates outright in a coordinated show of strength. The result has been a yo-yoing of rates.

In Singapore, the benchmark three-month Sibor was moving largely in a tight band this year. It sank to a low of 1 per cent in early August, but spiked to 2.23 per cent late last month. It is now at 1.5521 per cent.

With a home loan pegged to the three-month Sibor, the interest rate gets revised every three months.

With opinions still divided on where Sibor is headed next, home owners who prefer minimum risk may want to commit to a still-low interest rate for at least a year, experts say.

‘While many consumers are waiting for a clearer direction before they commit, it is a good time for risk-adverse customers to fix their rates given market volatility,’ said Mr Goh Eck Hong, spokesman for the firm, my housing loan.

Indeed, after the Sibor spike and given the volatility ahead, the three-month Sibor loan package, which used to be popular with home owners because it was the cheapest, has become less popular.

‘Three months back, the three-month Sibor rate was a sure approach,’ said Mr Geoffrey Ying, head of the mortgage division at financial advisory firm New Independent.

‘But now, more are gravitating towards the 12-month Sibor…It’s not as clear cut as before. Most people now want to be more cautious.’

Those who opt for loans pegged to the 12-month Sibor, currently at 1.7708 per cent, will not have to worry about extreme rate fluctuations in the short term, said Mr Ying. The rates are revised every 12 months.

‘As long as the (financial) stress doesn’t abate, you can expect to see interbank rates fluctuate - you’re going to see a period of volatility,’ he added.

At Standard Chartered Bank, the three-month Sibor package remains one of the top choices for customers. But the bank says there has been strong interest of late in the one-year fixed-rate package.

‘This package provides customers with peace of mind in today’s volatile interest-rate environment and they will benefit from Sibor pricing one year later,’ said its general manager of lending, Mr Dennis Khoo.

But say you are willing to take the risk of rate fluctuations altering your mortgage instalments. Or you have the flexibility to determine when to take out a new loan or refinance.

Should you opt for a three-month Sibor loan, or wait a little longer to refinance, in case Sibor goes further down?

Mr Leong Sze Hian, president of the Society of Financial Service Professionals, is among those who believe that interest rates tend to fall in a recession.

But, in a Friday report, Morgan Stanley Research said that due partly to a lack of confidence, the Sibor is ‘very likely’ to stay around 2 per cent for the rest of the year and reach 3 per cent by the end of next year.

Standard Chartered economist Alvin Liew is also of the view that Sibor will rise. This would affect those with Sibor-linked home loans and, more broadly, strain borrowing activity in Singapore, which is already expected to slow for the next six to 12 months at least, he said in a Friday report.

For those who are confused or prefer to just avoid the Sibor guessing game altogether, other options are available.

For those looking for fixed cashflow and protection against interest rate hikes, fixed-rate packages are more appropriate, said OCBC Bank’s head of consumer secured lending, Mr Gregory Chan.

Fixed-rate packages come with higher premiums, compared with so called transparent Sibor packages, but there is security and peace of mind, he said.

There are also in-betweens, like loan packages pegged to fairly stable rates like the CPF Ordinary Account (OA) rate.

These may be a good bet for the next year at least, said New Independent’s Mr Ying.

A CPF-rate package would cost the borrower a total interest rate of slightly below 3 per cent currently.

While the CPF OA rate can change, it has remained at 2.5 per cent since July 1999.

Source : Sunday Times - 12 Oct 2008

Rise in Sibor leads to bigger loan repayments but higher interest for cash deposits for some

The global credit crunch has started hitting home here with short-term interest spiking, spelling bad news for some home buyers but better news for those with cash in bank deposits.

Local banks are said to have tightened their credit to each other and to corporate clients, which has had the effect of making money harder to borrow.

The three-month Singapore Interbank Offered Rate (Sibor) has jumped in response, up by 100 basis points in just a month to 2 per cent.

Sibor is the rate at which banks lend cash to each other and so directly influences what consumers pay on loans like mortgages as many home loans are pegged to it.

Take a home buyer with a 20-year mortgage of $100,000 pegged to the three-month Sibor plus 1 per cent.

Sibor’s sharp rise could mean a monthly instalment of $506 surging to $555, according to United Overseas Bank’s (UOB) head of loans, Mr Kevin Lam.

The one-year Sibor rate has also been rising, though not as fast as its shorter variant. It moved from 1.75 per cent last month to about 1.875 per cent now.

‘The majority of our customers have chosen the 12-month Sibor, where the rates are fixed for 12 months. Their monthly instalments will not be affected since the rates will only be refreshed every 12 months,’ said a DBS spokesman.

Economists said short-term rates are elevated and rising, including those here, reflecting the ‘dislocations’ in global credit markets, as well as ’stresses amid the global shortage of US dollars’.

‘With everyone still wondering and suspecting who is next, credit and interbank markets are freezing up,’ said OCBC Bank economist Selena Ling.

While key central banks around the world have been injecting massive amounts of liquidity to break the impasse in the interbank markets, economists say this may not be enough.

Ms Ling said: ‘While these massive liquidity injections have ensured that funding for overnight to one week is still available, albeit at somewhat elevated rates, term funding exceeding one month is still hard to come by.’

Higher interbank rates could also translate into higher lending rates for companies, and analysts say this could add to ‘downside growth risks’ for countries like Singapore already hurt by export slowdowns.

Long-term Sibor rates have not risen as quickly as short-term ones, perhaps because funding pressures are more immediate in the short term, said Citigroup economist Kit Wei Zheng.

On the flip side, the rising Sibor has meant higher deposit rates for some savers.

HSBC’s rates for its multi-currency account, which are pegged to one-month interbank rates, has moved from 0.17 per cent a year as at Aug 29, to 1.17 per cent as at Sept 29 for amounts less than $25,000.

This gives a yield better than most saving deposit rates of 0.25 per cent, though HSBC’s rates for its multi-currency account could head south if short-term interbank rates fall.

Mr Dennis Khoo, general manager of lending at Standard Chartered Bank, said there will be ‘upside pressure’ on Singapore dollar Sibor in the immediate future.

But Mr Khoo expects the three-month Sibor to decline early next year to just below 1 per cent and remain around that depressed level for most of next year.

‘We believe a US government-led rescue plan for the banking sector should be finalised and announced soon,’ he said.

Since short-term interbank rates are expected to fall, consumers could consider a mortgage pegged to the three-month Sibor rather than one linked to the one-year Sibor, suggested Mr Leong Sze Hian, president of the Society of Financial Service Professionals.

Mr Leong described the current situation - where short-term rates are higher than long-term rates - as an anomaly. It is the credit crunch, he said.

As a result, he would pick a shorter-term Sibor-linked package despite the higher instalments over a longer-term one as the three-month Sibor would trend lower.

The same reasoning applies to fixed deposits. ‘If I’m putting money into a fixed deposit, I’ll put it in a two-year fixed as I’m afraid short-term rates will go down,’ he said.

Banks say that although the three-month Sibor has moved up significantly in the past week, Sibor-pegged home loans remain popular.

‘They continue to be favoured over fixed rates and variable rates schemes as the applicable gross rate (Sibor plus a mark-up) is still relatively lower than the other two rate types,’ said Mr Gregory Chan, OCBC’s head of secured lending.

Source : Straits Times - 30 Sept 2008

A SPIKE in the three-month Singapore interbank offered rate (Sibor) may spell higher housing loan rates for some, but mortgage experts say there is no cause for worry given the low base enjoyed by home owners for the past few months.

The benchmark Sibor, the rate at which banks lend to each other, for three months fell as low as 1 per cent in August. Amid recent financial turbulence, it soared from 1.76 per cent last week to 2.23 per cent before hovering at around 2 per cent yesterday.

Mr Dennis Ng, spokesman for mortgage consultancy www.HousingLoanSg.com, said 2 per cent is still considered low, given that the Sibor was around 3.5 per cent about 18 months ago, at which time home loan rates averaged around 4 to 5 per cent.

Banks that Today spoke to acknowledged the latest upswing in the three-month Sibor will affect those with home loan packages pegged to the interbank rate.

Mr Dennis Khoo, Standard Chartered Bank’s Singapore general manager of lending, expects upside pressure on Sibor “in theimmediate future”, causing the interest rates on Sibor-linkedhousing loans to moveupwards as well.

“The current fluctuations in the short term rates willaffect customers who have chosen packages pegged to the three and six-month Sibor,” said a spokesperson fromDBS Bank.

According to Mr Bryan Ong from bcp.com.sg, homeowners can expect to pay about $80 - $300 more per month for an outstanding mortgage of $500,000, should the Sibor rise from 1.3 per cent, the average rate from February to early September, to 2 per cent.

Mr Ong, who provides mortgage consultancy for private properties via the website, also advised customers worried about the current spike to go for a 12-month Sibor fixed rate that is less volatile.

But such loan packages typically charge a higher rate as a trade-off for more certainty, noted Ms Annie Lim, managing director of Global Creatif Financial. “The majority of our customers have chosen the 12-month Sibor - where the rates are fixed for 12 months - and their monthly instalments will not be affected since the rates will only be refreshed every 12 months,” added DBS.

Mr Ng also added that loans pegged to banks’ internal board rates will also be influenced by Sibor - though it is harder to gauge the increase, as these board rates are less transparent.

Still, most experts expect the Sibor spike to be temporary, with Standard Chartered’s Mr Khoo predicting a dip below 1 per cent in early 2009 and remaining around that level for the year.

Source : Today - 30 Sept 2008

Short-term interest rates here jumped again yesterday, sending it higher than the US Fed Fund rate of 2 per cent and causing the Monetary Authority of Singapore to inject money into the system.

Underlining the seriousness of the situation, the MAS in a rare statement confirmed that it had intervened in the interbank market.

‘A combination of a dislocation in global money markets and quarter-end funding pressures caused Singapore dollar interest rates to firm this morning. To ease market funding pressures, MAS kept a higher level of liquidity in the banking system through its market operations,’ it said last night.

The 3-month Sibor or Singapore interbank offer rate was fixed by the Association of Banks at 2.23 per cent yesterday, up from 1.76 per cent on Thursday.

‘Rates have since eased to about 2 per cent,’ the MAS said.

MAS said that it was prepared to inject additional liquidity, if required. The 3-month Sibor is now almost double of what it was a month ago.

This could hit home loan borrowers who have been enjoying low interest rates, especially those on interbank pegged rates.

A month ago, on August 26, the 3-month Sibor was 1.18750, up slightly from a low of one per cent on August 7.

‘Banks are tightening credit to each other and to their customers,’ said Matthew Wilson, Morgan Stanley analyst.

Capital is scarce globally and banks are responding by rationing or preserving capital, he said. ‘Refinancing may become more difficult and we risk entering a vicious credit/capital cycle as de-leveraging takes hold,’ said Mr Wilson.

‘Unless risk aversion subsides and/or the Fed cuts the Feds rates, upward pressures on domestic interest rates could persist for awhile,’ said Kit Wei Zheng, Citigroup economist. Despite coordinated action by global central banks to inject liquidity, USD interest rates could stay high near term, pulling up SGD interest rates as well, said Mr Kit.

Ho Woei Chen, United Overseas Bank economist noted that with the exception of the Asian financial crisis, the 3-month Sibor has always been trading at a discount to the Fed funds target rate which is currently at 2.00 per cent. ‘We expect the current phenomenon to be temporary,’ she said.

The spike in wholesale interest rates will hurt home loan borrowers who peg their loans to Sibor. ‘Volatility in interest rates causes mortgage instalments to vary with each re-pricing period,’ said Kevin Lam, UOB head of loans.

‘This could affect customers’ personal cashflow management. For example, if the Sibor rate increases by one per cent, a customer with a $500,000 loan (on 20 years loan tenure) will see his annual instalment increase by $2.928,’ said Mr Lam.

Source : Business Times - 27 Sept 2008

The turbulence in global financial markets hit home yesterday when the three-month Singapore Interbank Offered Rate (Sibor) shot up to 2.23 per cent from 1.76 per cent on Thursday.

The Sibor is the level at which banks lend to one another and it has a direct link to how much the rest of us pay for borrowed money.

Although rates have since eased to about 2 per cent, market watchers say the rise was a sure sign of troubled economic times ahead.

‘The spike reflects the spillover from the US funding freeze and also the increase in risk aversion in the local interbank market following the collapse of Lehman Brothers,’ said Citigroup economist Kit Wei Zheng.

‘But even before the Lehman collapse, domestic short-term interest rates were already facing some upward pressure because liquidity was normalising from previously very loose conditions.’

The Monetary Authority of Singapore (MAS) issued a statement last night saying that a ‘combination of a dislocation in global money markets and quarter-end funding pressures caused the Singapore- dollar interest rates to firm’.

And to ease market funding pressures, the MAS said it has kept a higher level of liquidity in the banking system through ‘its market operations’.

The MAS also said that it remains in close contact with market participants and is ready to ‘inject additional liquidity as required’.

However, economists say that move may provide only temporary relief.

‘Our view is that while the MAS’ liquidity injection may moderate the increases of interest rates, or even bring them down somewhat, it is quite unlikely that rates will regress to previous levels any time soon,’ said Mr Kit.

Source : Straits Times - 27 Sept 2008