When deciding on a mortgage package that is pegged to the SIBOR, you will typically be offered a selection of different rate structures: One month SIBOR, 3 month SIBOR, etc. This might be confusing to first-time buyers, who don't understand the implications. Selecting the best rate structure make a difference to your financial planning, and the overall long-term cost of the loan. In this article, we examine the key difference concerning the two most common structures: 1 month and 3 month SIBOR rates:
1 month and 3 month SIBOR are the most standard options for Singapore house loans.
What Does "X Month SIBOR" Mean?
The number of months listed in front of the SIBOR rate determines how frequently the rate is renewed. You can discover a little more about the SIBOR in our previous article.
A one month SIBOR suggests that, every month, your home loan rate is going to be adjusted to match the current SIBOR rate. A Three month SIBOR means the rate is adjusted every three months. It is also possible for a bank loan (not just residential loans) to have SIBOR rates of 1, 3, 6, 9, and 12 months.
For mortgage loans, the most common rates are one month SIBOR and three month SIBOR. Do take note that loans from banks for HDB flats only offer 3 month SIBOR.
Why Should You Use Monthly Adjustments?
Monthly rates prevent residential loans from changing into a "stock market", fraught with speculation.
Banks use monthly changes to prevent speculative timing.
SIBOR rates change each day. If home loan rates were to fluctuate as often, borrowers would treat SIBOR like they would the stock market: We might have borrowers speculating on rates, and then rushing to get loans processed on specific days.
The outcome would be accounting and administrative complexity, for both banks and borrowers. On the borrower's end, it would mean you're susceptible to increased fluctuations in the interest rates. Also, you'd need to track the market on a regular basis to "time" the loan application.
For this reason, banks simplify the procedure by using monthly adjustments.
The rate for the month is generally the SIBOR rate on the first business day of the particular month. Therefore if the SIBOR rate on first working day of your particular month is 0.32%, everyone who signs up for a loan on any day within that specific month uses the same 0.32% rate.
Note: Some banks will use the month that the letter of offer is signed as the starting month to obtain the SIBOR rate even though some will use the month that the loan is disbursed (usually 3 months later).
Which is Better, 1 month or three month?
If SIBOR falls month-on-month, a 1 month rate is cheaper.
This depends on the current direction of interest rates. When SIBOR rates are falling, an one month rate will be cheaper than a 3 month rate. However, if interest rates are rising, the contrary is true.
1 month SIBOR rates adjust very quickly, whereas a three month rate takes time to adjust. So if SIBOR is falling month-on-month, the 1 month SIBOR would match the plunge, causing your home loan to be less expensive.
But if SIBOR is rising, the one month rate would match it and rise just as quickly. Conversely, a three month SIBOR would maintain the lower rates from previous months.
Note that choosing an one month or 3 month rate is just one way to lower house loan repayments.
I am Getting a Loan Now, Which Should I Pick?
At present, analyst believe that the SIBOR rates have bottomed out. We're at a 10 year low, and it's improbable that SIBOR can fall further. Due to the global economy and quantitative easing, the currently low rates might persist till 2013 - 2015.
But if you believe SIBOR rates can still fall (or at least not rise), you might want to try for a 1 month SIBOR anyway. There may still be price dips to capture in the next two to three years; but you'd best prepare to refinance after that.
Otherwise, a three month SIBOR provides greater stability. Should the interest rates start to climb, at least the process will be slower for you.
Author Resource:
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