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The interest of a Floating Rate Loan package fluctuates during the entire loan period. The factors determining these changes depend largely on the market forces and the type of floating package chosen. Knowing that the rates change with time, how do you decide which rates to choose? What is difference between them?
3 Common Floating Packages / Variable Packages:
What is Internal Board Rate?
The Internal Board Rate (IBR) is a rate determined by the lending financial institution using their unique methods or formulas to compute their standing board rate. The annual interest rate is calculated by deducting the discount factor from the board rate to achieve the final offered rates.
Over the past few years, movements on banks’ board rates have not seen much activity and are currently known to be rather stable. However, it is noted that the banks’ reserve the rights and can change these rates from time to time prior to giving 30 days of notice. Hence, most of the time, borrowers remain skeptical and prefers an interest rate package that is transparent such as the SOR and SIBOR.
What is SOR?
SOR stands for Swap Offer Rate which is based on the foreign exchange rate with the US dollar. The forward-implied rate is calculated from a one month or three month USD/SGD forwards at a certain cost for a period of time. As the SOR rates are pegged to the US interest and exchange rates, volatility in the foreign exchange and US market conditions, mortgage policies, contributes to the fluctuation of the rate. As such, the SOR rate changes every day.
SOR interest rate packages are usually offered on a 1 month or 3 months basis. Banks would traditionally add a spread or margin on top of the respective SOR rate to derive the final interests charged. Selecting a 1 month SOR package would mean that your interest rate will change on a monthly basis locking in the new SOR rate which is determined on the review date. Similarly, this applies to the three month SOR packages that are commonly offered instead of one-month SOR package as it is more stable.
What is SIBOR?
SIBOR stands for the Singapore Interbank Offered Rate which also represents the interest rates at which banks lend to each other. It fluctuate base on the supply and demand of funds between the banks located in Singapore. Not only does SIBOR affect your property loan interest rates, it also influences the interests offered for your deposits to the banks. When SIBOR falls, it means that borrowing between banks become cheaper. Hence, banks are more likely to borrow from each other to fund their activities rather than offer attractive interest rates to attract more saving deposits. On the contrary, if SIBOR were to rise, the cost of borrowing would also increase. As such, banks will start to offer higher interest rates to attract more funds from depositors.
Similar to SOR, SIBOR is also offered on a 1-month or 3 months basis. Interest rates for 1-month SIBOR is lower compared to 3-month SIBOR due to that fact that it is more unstable as it changes on a monthly basis.
What rates should I choose?
Choosing between the Internal Board Rate, SOR, and SIBOR requires an understanding on the trend and direction of where these rates are headed towards. Traditionally, these rates move in the same direction. The question is how stable are they? As SOR is tied to the US interests and exchange rates, it is more volatile than SIBOR which is influenced by the domestic market. If the interest rate market were to fall, SOR would usually fall much faster than SIBOR and borrowers would then be able to enjoy the lower rates presented. Likewise, if SOR were to rise, it will move up faster than SIBOR.
Understanding how the mortgage industry works can be a rather complicated process. If you understand and make the right decisions when choosing a property loan, you can potentially save a substantial amount of money.