If you are looking for housing loan, you will realise that there are a few different types of packages to choose from. Home loan borrowers are spoilt for choice with a myriad of loan packages that are offered by banks.
More than a decade ago, you can only find housing loan packages that are pegged to bank’s board rates. Bank’s board rate is internal cost set by the bank. Around 2006-2007, banks introduced packages that are pegged to SIBOR (Singapore Interbank Offer Rate) or Swap Offer Rate (SOR) which offers more transparency. SIBOR and SOR are considered market rates.
In 2014, we saw DBS launched home loan packages pegged to their Fixed Deposit rate. The other banks, like UOB, OCBC and Stanchart, also followed suit in offering mortgages pegged to banks' fixed deposit rates.
With this, we came across more customers checking on the differences between property loan pegged to SIBOR, Fixed Deposit rates and Board rates.
What are the main differences between SIBOR, Fixed Deposit and Board rate-pegged packages?
SIBOR is the most transparent as it is the average lending rate of more than 10 banks collated by Association of Banks in Singapore (ABS) on daily basis. The rate moves according to market. Banks are not able to control the rate. All banks are using the same SIBOR.
Fixed Deposit rate-pegged packages are controlled by the individual banks. Each bank has its own fixed deposit rates. For example, DBS uses 18 month fixed deposit rate (DBS FHR18) for their housing loan, UOB and OCBC use 36 month fixed deposit rate (UOB FDPR and OCBC FDMR) whilst Stanchart uses 48 month fixed deposit rate (FDR).
Earlier on, DBS has priced their package to the average of 12 month and 24 month fixed deposit (DBS FHR). The bank no longer offers such package now and has moved on to 18 month fixed deposit rate since early 2016.
Similar to Fixed Deposit rate-pegged packages, Board rates are also controlled by individual banks. Each bank has its own board rates. Currently, banks like, Maybank, RHB, CIMB, Hong Leong Finance, etc. are offering such packages.
Frequency of rate change
Home loan rates pegged to 1 month SIBOR are updated every month. Those pegged to 3 month SIBOR are updated every 3 months. Whilst for 12 month SIBOR, the rate is updated every 12 months.
On the other hand, frequency of change in Fixed Deposit rates is at the discretion of banks. There is no fixed timing and frequency. Generally, they are not as frequent as SIBOR. For example, banks have not changed their respective Fixed Deposit rates since 2011 till now, except DBS, which revised their Fixed Deposit rates once in Dec 2015.
Similar to Fixed Deposit rate-pegged packages, any change in Board rates are at the discretion of banks. There is no fixed timing. From recent experience, we understand that some banks adjusted their board rates upwards once or twice in 2015 when SIBOR is trending upwards.
Upside/ Downside Potential
All three types of rates, be it SIBOR, Fixed Deposit rates or board rates have potential to move up with increase in US interest rate. The pace will depend on economic factors as well.
For packages pegged to SIBOR, you may be paying lower when SIBOR is trending downwards. And when SIBOR is trending upwards, you may be paying more. You are actually ‘riding’ with the market rise and fall.
For Fixed Deposit rate-pegged packages, the reaction to any change may be delayed given that it is dependent on when the banks adjust them and how much they adjust.
Similar to Fixed Deposit rate-pegged packages, the reaction of board rates to any change may be delayed given that it is dependent on when banks adjust them and how much they adjust. However, from past experience, we noticed banks increased their board rates when market rate goes up and rarely banks reduced their board rates when market rate comes down. The most they maintain the board rates and you pay the same home loan rates.