Experts give tips as such packages become more popular amid rising benchmarks
Beware penalty fees and lock-in period
The very real prospect of higher housing loan repayments is prompting many home owners to move to fixed-rate mortgages.
These loans have rates that are set for a certain period, usually over two to five years, so customers have certainty about the level of their repayments.
Many home owners are aware that the Singapore Interbank Offered Rate (Sibor), a key rate used to price most home loans, has been creeping up and is now at a level that has not been seen since December 2008.
The three-month Sibor hit 1.01959 per cent last Thursday, up from 1.01446 last Tuesday, with more increases to come once rates in the United States start to rise.
Moving to a fixed-rate loan would make sense for many, but there are factors to consider first, say banks and mortgage brokers.
Know the difference
Many home buyers are now on floating-rate loans, where the interest rate is pegged to market benchmarks such as the Sibor or, less commonly, the Swap Offer Rate (SOR).
The bank usually tacks on a pre-mium, also known as a spread, to the benchmark rate.
These packages became popular when interest rates plunged to near zero after the financial crisis, but times are changing and the spotlight is turning to fixed-rate loans.
Ms Tok Geok Peng, executive director of secured lending at DBS Bank, says such packages offer greater stability as the housing loan rate is set for a period of time.
Pros and cons of fixed-rate loans
The fixed-rate loan will not be affected by the Sibor increase, but the trade-off is that the fixed interest rate will be higher than those of the floating-rate package.
Ms Sandhya Devanathan, retail products head in Singapore at Standard Chartered Bank, warns: "Some fixed-rate packages may be subject to a fee if the borrower were to do a partial prepayment or a full redemption of his loan during the lock-in period."
Fixed-rate loans are also more suitable for owner-occupiers and those with a longer investment time horizon, notes Mr Lim Beng Hua, head of secured loans at UOB Singapore.
When to switch?
Mr Keff Hui, a broker at Mortgage Supermart Singapore, feels it is time to switch "as we are now only in the very early stages of an impending interest upswing cycle".
Based on recent analyst estimates, he says, the Sibor is likely to reach 1.5 per cent by the end of the year and possibly 2.5 per cent by the end of next year.
"If that estimate holds true, adding a mark-up spread of about 0.75 per cent to 0.85 per cent, we would be seeing home loans at a minimum of between 2.25 and 3.35 per cent by the end of 2016."
He adds that ever since the sharp increase in the Sibor in early February, banks have been revising their fixed-rate packages every one to two weeks. Current promotional rates for a two- to five-year fixed-rate home loan range from 1.5 per cent to 2.28 per cent.
"Some banks may also impose conditions for only owner-occupied properties, while some banks may have a minimum loan amount," says Mr Hui.
Mr Sean Lim, founder of FindAHomeLoan.co, brings up an overlooked guideline in reference to the Total Debt Servicing Ratio (TDSR) framework, where some home owners are exempted.
The TDSR caps a borrower's total debt repayments at 60 per cent of gross monthly income.
It is applicable to home owners who refinance existing property loans on or after June 29, 2013.
If you bought a residential property before the TDSR rules kicked in and you occupy it, banks are not required to apply the 60 per cent threshold at refinancing.
Banks also do not need to apply the 60 per cent threshold for an investment property bought before the introduction of the TDSR, if the owner applies for refinancing before June 30, 2017 and commits to a debt-reduction plan.
Mr Lim says: "Now might be the last opportunity to secure attractive fixed-rate packages, as most banks have revised them upwards."
Selecting what's right for you
FindAHomeLoan.co's Mr Lim says a home owner needs to ask these questions:
- Am I holding the property for the short or medium term?
- Do I need TDSR exemption?
- What is my comfort level if interest rates continue to rise?
DBS Bank's Ms Tok says: "Regardless of interest rate trends, we strongly advise anyone with a housing loan to set aside funds as a buffer against interest rate hikes or any unforeseen circumstances."
It is ideal to set aside some savings in cash or liquid assets that can be used to pay for monthly instalments for the next two years.
Ms Tok says this would give home owners sufficient time to restructure their loan or even sell the property if they run into any financial issues.
Home owners should also approach their bank early for help in restructuring their loans if they have difficulties keeping up with monthly repayments.
For an idea of what is out there, DBS offers loan packages that cap the interest rate at a certain level if the reference rate keeps rising.
UOB's Homestar is a variable package pegged to the bank's floating board rate, with the loan tied to a current account. Under this package, if the home owner has an outstanding loan of $500,000 and deposits $100,000 in the current account, interest is charged on $400,000.
UOB notes that besides looking at the interest rate, owners should assess the other terms of a loan package, such as tenure, penalty fees and lock-in periods, in order to select the one best suited to their needs.
Mr Hui says that home owners should also look at flexibility to do partial repayments, cash rebates and legal subsidies.
He advises home owners to review the interest reference mechanism with their loans. Besides fixed rates, Sibor and SOR, board rates and the fixed deposit home rate should also be considered.
Mr Hui also gives this pointer: "Compute the average rates over the promotional interest period of two to three years, instead of just looking at the introductory first-year teaser rate.
"Some packages may have very low teaser rates in the first year, while the second- and third-year interest rates tier up or increase significantly."
Published on 5 Apr 2015 Sunday
The Sunday Times - INVEST