Deciphering home loan packages and interest rates

Whether you are a first-time homebuyer or looking into investing in a property, securing the right housing loan package that suits your financial needs is of utmost importance.

In Singapore, the major banks offer highly competitive housing loan interest rates and packages.

Understanding the differences between these packages and their impact on your financial commitment will help you decide on the most suitable housing loan package.

What are the different housing loan packages available, and who is more suitable for each type of package?

Fixed rate packages

For fixed rate packages, the interest rates indicated are fixed and guaranteed for the initial few years. Specifically, there are packages with fixed rate for the first year only or with fixed rates for up to two to four years.

Fixed interest rates for the initial years are calculated by the bank based on the cost of getting the funds to lend to the customer plus a spread.

For most banks' fixed interest rates housing loans packages, the fixed rate is for the specific number of years stated in the Letter of Offer.

Thereafter, the rates will be based on the bank's Board Rates minus a discount stated in the Letter of Offer.

Fixed rates housing loans are more suitable for individuals who want their monthly instalments to remain stable.

As the interest rate is fixed for the lock-in period, the monthly instalments will be fixed and will not change at all.

This will allow the individual to plan their finances in advance with more accuracy and stability.

Floating (Variable or Market-pegged) rate packages

Floating interest rates housing loans specifically refer to two different variants of housing loans packages offered by banks in Singapore:

1) Variable rate packages based on the bank's Board Rate minus a discount stated in the Letter of Offer.

The bank will have to notify customers 30 days in advance when they want to revise the Board Rate.

Variable rate packages can offer some level of stability as it is based on the bank's Board rates and the bank has to inform customers of any changes 30 days in advance.

Hence, variable interest rates packages will be suitable for property buyers who want to capitalise on the current low interest rates, but do not want to worry about reacting to sudden spikes in the market interest rates (that is, the Singapore Interbank Offered Rate or Sibor).

2) Market-pegged rate packages are pegged to Sibor or the Singapore Swap Offer Rate (SOR). The rates will move with changes to these market rates.

Sibor is a publicly available rate by which banks lend to each other in Singapore.

The Sibor applied on your housing loan is the rate at 11am daily.

There are Sibor for various tenors, but housing loans in Singapore are typically based on the three-month Sibor although some banks offer the one-month Sibor.

The bank applies the Sibor on a specific date known as the Rate Review Date, and adds on a specific percentage above the Sibor to be used as the interest rate.

For example, if the three-month Sibor is used, its interest rate will be reviewed every three months, and the three-month Sibor rate on the Rate Review Date plus the add-on percentage will be used as the interest rate for the next three months until the next Rate Review Date.

SOR is made up of Sibor plus the bank's lending cost.

Market-pegged interest rates are more suitable for savvy property owners who would like to capitalise on the current low interest rates to minimise the interest payments they make on their current loans and are aware that their home loan interest will move with changes in Sibor or SOR.

•How can one get advice on choosing a suitable loan package?

There are many ways to get advice for deciding on the best loan package. The easiest way is to speak to a mortgage specialist who can assist you on the following steps:

1) Establish your financial needs

2) Assess your current financial position

3) Recommend customised mortgage solutions

One may also refer to an information brochure published by The Association of Banks in Singapore (ABS) titled, About Home Loans - Key Questions to Ask the Bank Before Taking a Home Loan available in four languages (English, Chinese, Malay and Tamil) via www.abs.org.sg or www.moneysense.gov.sg.

In many situations, the lowest interest rates package at the point of time may not always be the best option as customers have different financial objectives they want to achieve.

We strongly advise our customers to understand their needs and financial goals better before deciding on a loan package to finance their property.

Talking to different sales staff from other banks will also allow the customer to have a better understanding of the market, and how the bank will be able to service their long-term commitment.

• If an individual hopes to invest in property, which type of loan package is more suitable?

If one wishes to invest in property with the view that the property prices will appreciate in the coming years, a floating rate package may be suitable.

Buying a home is a significant long-term commitment.

When choosing a home loan, it is important for customers to take a holistic view that goes beyond just pricing.

Besides interest rates, factors that determine a good home loan package include the flexibility to customise a loan based on individual requirements such as quantum of cash, as well as CPF savings to be set aside from time to time. Other value-added benefits such as no pre-payment penalty and simplicity in loan application processes are also important considerations.

A home loan strategy need not be a one-size fits all approach, but can be tailored to offer customers choice, flexibility and value so that they enjoy a total home financing solution.

In making the home loan advisory experience more engaging and efficient for customers, OCBC has an iPad application that allows its mortgage specialists to demonstrate various financing packages quickly and easily to customers.

A first-of-its-kind in Singapore, the iPad application also includes other useful information and calculators to enable more productive interactions with customers.

The writer is head, consumer secured lending, global consumer financial services, at OCBC Bank Fixed rates housing loans are more suitable for individuals who want their monthly instalments to remain stable.

As the interest rate is fixed for the lock-in period, the monthly instalments will be fixed and will not change at all.

This will allow the individual to plan their finances in advance with more accuracy and stability.

Market-pegged interest rates are more suitable for savvy property owners who would like to capitalise on the current low interest rates to minimise the interest payments they make on their current loans and are aware that their home loan interest will move with changes in Sibor or SOR.