A battle has broken out in the home loans market, with banks pushing down their interest rates over the past few weeks. DBS Bank fired the first volley and now others have responded.
This is good news for all home owners and those investors looking to refinance or re-price their mortgages. The rates also give a positive sign to the recovery in the real estate market. But several advisers are telling clients to be cautious and to closely watch their debt servicing ratios.
So far, Maybank appears to be offering the most attractive loan rates in terms of variable rate loans. Its package, which is based on an internal board rate, starts from 1.18 percent for the first year up to 2.28 percent in the third year.
And for those who prefer a more transparent rate, the Sibor (Singapore interbank offered rate) and SOR (Singapore swap offer rate) have declined to 0.5 percent interest rates.
The lower interest rates typically come with shorter lock-in periods. Mortgage borrowers who are certain in the rates they pay in the longer term should also be prepared to pay more and be locked-in for two to three years.
The question is where the interest rate is heading. The common expectations of many home owners is that interest rates will increase in the next two years. Currently, interest rates are close to the all-time lows over 10 years. In 2003, the lowest point for Sibor and SOR were recorded to be 0.56 and 0.54 percent, respectively. Today, Sibor and SOR are at about 0.66 and 0.42 percent, respectively.
Alvin Liew, an economist from Standard Chartered Bank, said that the three-month rates of Sibor could stay below one percent over the next two years, in accordance to the bank’s expectations for USD Libor.
“Moderate loan demand and ample SGD liquidity will also help to keep rates low. While we believe there is a possibility that the Fed would increase further the discount rate spread over the Federal Funds Target Rate (FFTR), this should be viewed as a continuation of financial market normalisation, and not signalling any change in the FFTR until late 2011.”
Sibor reflects the interest rates that a bank charges for the excess SGD it does not need. SOR, on the other hand, includes bank funding costs and is slightly higher that the Sibor. But in the last few months, SOR declined below Sibor.
Patrick Tan, mortgage adviser at Morgan Mortgage International, is advising home owners not to quickly leap into a long fixed rate contract, as the servicing costs differential between fixed and floating packages can be substantial. “’Even if the variable Sibor or SOR rate does move up, it will not move up too much or too quickly unless we see an inflationary scenario in our economy.”
DBS said that its fixed-rate packages remain “very popular”, with almost 60 percent of the clients opting for them. “The response is not surprising as they were designed specifically to give home owners both the certainty in repayments over three years, and the flexibility to make partial repayments. The flexibility is usually not found in fixed rate packages,” said a DBS spokesman.
Meanwhile, banks have also sped up their home loan approvals. DBS said that more than 50 percent of clients got their loan approvals within a day.
Stanchart also said that it offers “approval in principle” within 15 minutes. “This way customers know how much they can afford to borrow without over-leveraging,” said a Stanchart spokesman. In-principle approval is based on basic information like financial commitments and monthly income.