Tags: interest rates / sibor

Floating back to Fixed...?

- October 8, 2011 No Comments

As interest rates threaten to inch higher, more home loan buyers are turning to fixed rate loans for peace of mind. The key three-month Sibor or interbank rate yesterday ended at 0.38%. Although unchanged from the previous day, it is now up almost 12% from a month ago when it hit a low 0.34% on Sept 9.

DBS Bank, the largest home loan provider here, said 20% of new borrowers now go for its interest rate cap package, first launched in August. Since Sept 1 the rate has been sitting at 1.49%.

A DBS spokeswoman said that while the outlook for interest rates is to remain low for an extended period, the volatile global economic environment has created risks and uncertainties.

“To give customers peace of mind when it comes to their mortgage repayment, which is a long-term commitment, DBS introduced three-month Sibor floating rate packages with interest rate cap in August,” she said. “Under this unique scheme, customers benefit from the current low interest rate and at the same time, enjoy certainty if interest rate starts to rise.

“Since its introduction, 20% of our customers who have opted for 3-month Sibor packages have taken up this scheme,” she added.

More and more analysts expect local interest rates to rise further given the slower economic growth outlook which could lead the Monetary Authority of Singapore to slow down the rate of appreciation of the Singapore dollar at next week’s monetary policy statement.

“We expect a slower rate of appreciation of the SGD which means that interest rates will rise relative to the US interest rates,” said Wei Zheng Kit, Citi economist. The three-month Sibor could rise to 0.50 – 0.70%, depending on the stand the MAS take next week, he said.

Bankers said that given the uncertainty it will be better for borrowers to opt for a package which gives flexibility.

Alan Lau, Maybank Singapore head of consumer banking, said that traditionally its fixed rate home loan packages have been very popular with its customers, but in recent months, more have gone for the inter-bank pegged packages, in part due to the low interbank rates environment.

“Yet there is a segment of customers who take a short-term view that Sibor rates will remain relatively low but want to hedge their risks against possible uptrend of interest rates after 12 months,” he said.

Maybank’s hybrid home loan packages which come with the first-year rate pegged against the three-month Sibor and thereafter fixed rates for the second or second and third years will cater well for this group of customers, said Mr Lau.

Source: The Business Times

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Tags: interest rates / news / sibor

We did say it's too good to last...

- September 30, 2011 No Comments

Reference: "3-month Sibor on the rise amid market turmoil" - The Business Times


Some of you may think to yourselves: even with SIBOR at 0.5%, the interest rate is still way to cheap to pass over on that THIRD investment property. Didn't KF said just yesterday that private home prices will continue to go up?!

Well, good luck with that...

Click below to read our previous post on the anticipated rise in interest rates:
http://sgproptalk.blogspot.com/2011/09/interest-rates-to-go-up-in-6-months.html

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Tags: interest rates

Interest rates to go up in 6 months' time?

- September 20, 2011 No Comments

Interest rates in Singapore may rise - from their lowest levels in 40 years - as early as March next year, according to analysts.

They say home loan refinancing is surging, but bank profitability and the rising cost of funds offshore may force the banks' hand.

Banks could be forced to raise their home loan interest rates as early as six months from now.

Low rates have hurt their profitability and they will not bear the razor-thin margins for ever.

Dennis Ng, CEO of HousingLoanSg.com said: "Banks may be forced to increase the interest margin on their housing loans. (With the three-month SIBOR at 0.35 per cent, even if they add in an interest margin of 0.6 or 0.7%, the total interest rate would be about one per cent - and that, to a lot of banks, means that profitability is affected."

This means that home loans, which are currently in the range of 1 to 1.2%, may go up as much as 0.3 percentage points by early next year. That is even if the Singapore Interbank Offered Rate, or SIBOR, component of home loans remains low.

Banks such as UOB, DBS and Maybank have stopped offering Swap Offered Rate (SOR) pegged loans as SOR rates turned negative earlier this year, while foreign banks have to deal with potentially higher borrowing costs offshore.

Tai Hui, regional head of research, SE Asia, Standard Chartered Bank, said: "It's also worth noting that the low interest rate environment will not last forever, even though it may be for the next year or two.

"So I think it's interesting to find an opportune time to lock in low interest rates once we start to see some degree of stabilisation and some degree of return in confidence."

The low interest rate environment has fuelled a resurgence in home loans refinancing.

According to loans consultancy HousingLoanSG, home loans refinancing rose 30% in the first half of this year, compared to the same period a year ago.

Borrowers have been particularly attracted to packages that protect them from future SIBOR increases. For example, DBS Bank has a loan pegged to the three-month SIBOR, with a spread of 0.85% for the first three years. This means that the interest rate is capped at 1.49% for the first three years.

It is loans growth that is keeping banks profitable and not the rates they charge, which is giving borrowers an unrealistic sense of cheap money.

Analysts say a better gauge of affordability is to factor in rates of 3 or 4% - an indication of where rates are headed as early as next year.

Source: Channel News Asia

Those who have been following our blog will know that the wife and I are skeptics about the sustainability of the current low interest rate environment. We have also raised concerns about possible rate hikes in the foreseeable future. It looks like even the analysts are singing the same tune now.

Some may argue that a 0.3% increase is peanuts given the low rates that are still being offered by our banks. However, such "small" increases will stack up pretty quickly once the banks decide to move their rates up every couple of months...
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Tags: home loan / interest rates / sibor

Thinking about refinancing your home loan?

- September 4, 2011 No Comments

Everyone (probably even the dog) knows that local interest rates have hit rock-bottom lately. Sibor/SOR rates are at record lows so it may be a good time to refinance that home loan.

Following is taken from an article in The Sunday Times today, which provides some useful pointers for those of you who are thinking about refinancing.

Fixed or pegged rates?
Customers usually take fixed-rate loan packages – where the rates are fixed for the first two to three years – when they need protection against rate hikes.

The United States Federal Reserve has pledged to keep interest rates low until mid-2013 so rates here are also likely to remain flat. Packages pegged to the Sibor or SOR may be more cost-effective.

Mr Goh Eck Hong, a housing loan adviser at MyHousingLoan.com.sg, said: “People who took up fixed-rate packages should give some thought to refinancing.”

“Since local lending rates move in tandem with the US’, it is reasonably safe to assume that the local mortagage lending rate is going to stay where it is for some time to come.”

But there is no guarantee, so some customers might want to opt for the fixed-rate option, said Citibank Singapore’s business director for secured finance, Mr Peng Chun Hsien.

“An attractive fixed-rate package, which will fix the interest rates for a specific duration, can offer peace of mind. There will be certainty in their monthly repayments for the next two to three years.”

Attractive packages
Citibank is offering a one-month Sibor plus 0.7% loan package. With the one-month Sibor at 0.218%, this works out to effective interest rates starting from as low as 0.918% throughout the loan tenure.

Their customers can also switch between one-, three-, six- and 12-month Sibor tenors, or from a floating rate to a fixed rate free of charge.

OCBC Bank’s deal has a three-year lock-in, and on top of the three-month Sibor, has a spread of 0.55% for the first year, 0.6% in the second, and 0.65% in the third, and 1.25% thereafter.

DBS Bank’s latest offer is pegged to the one-month Sibor or three-month Sibor, with a spread of 0.85% for the first three years. For the three-month Sibor package, the interest rate is capped at 1.49% for the first three years.

HSBC has a loyalty package, which is Sibor plus 0.9% for the first year, 0.85% for the second and 0.8% thereafter. There is a cash incentive of 0.4% of the loan amount, capped at $10,000.

Is this a good time to refinance?
If you have borrowed $1 million over the next 20 years with a current interest rate of 3.75% and refinance it to 1.18% in the first year, the savings amount to about $1,000 a month.

Mr Derrick Ang, director of mortgage sales at consultancy portal SingaporeHousingLoan.sg, said that in general it is prudent for home owners to review their loans every three year or so, regardless of interest rates.

He added: “If there are significant cost or interest savings, I would recommend it.”

But there are various costs that come with refinancing, so home owners should make sure the savings outweigh them.

Cost-benefit analysis
As a rule of the thumb, if you plan to sell your property in the short term, it may not be wise to refinance, taking into account the cost incurred and the limited time that home owners get to enjoy the interest savings.

Costs incurred from refinancing include:
1. Lock-in period of the existing loan
A typical lock-in period is two to three years so if you withdraw your loan within this time, there might be a penalty of 1% to 1.5% of the outstanding loan.

Property owners thinking of selling in the next two to three years should choose a package with a shorter penalty period or one with no penalties attached over one that imposes a penalty.

2. Conversion fee
There is a conversion fee of $500 to $1,000 which will be incurred even if you are no longer within the lock-in period.

3. Clawbacks
Refinancing requires conveyancing paperwork. However, the new bank will usually subsidise this cost, about 0.3% to 0.4% of the loan amount, capped at $2,500 for private properties or $2,000 for HDB flats.

Mr John Lee, head of free online home financing service LaonGuru.com.sg, said that the legal clawbacks is always three years; even if the lock-in period is two years, the legal subsidy has to be returned.

Some other subsidies, such as valuation and fire insurance, may also have a three-year full clawback period.

Is refinancing for me?
The choice comes down to whether there will be a significant amount of savings after subtracting the cost of refinancing.

DBS Bank’s managing director and head of deposits and secured lending, Ms Lui Sau Kian, said: “Buyers should remain prudent and take into consideration how interest rates will impact their repayment and not focus solely on the initial years’ interest rates.”

UOB’s head of loans division, Ms Chia Siew Cheng, agreed: “Buying a home is a long-term financial commitment.”

“Regardless of the prevailing interest rate environment, home buyers should always assess what they can afford to ensure they are able to service a housing loan over a longer period of time.”

Source: The Sunday Times

The final remark by Ms Chia is especially apt – One can easily fall into the lull of complacency when interest rates are so low, and end up overstretching their loan amounts to the point whereby servicing becomes a problem once Sibor starts to climb.

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Tags: interest rates / sibor

New home loan products from DBS.. Sibor-based, of course

- September 3, 2011 1 Comment

Group has launched three new home loan packages to attract home buyers looking to benefit from current low interest rates.

One of these products is pegged to three-month Singapore Interbank Offered Rate (Sibor) plus a spread. The home loan rate will be capped at 1.49% for the first three years to provide borrowers with some degree of stability and protection against future Sibor increases.

The second package is pegged to the one-month Sibor plus a spread, and the benchmark rate will be refreshed every three months. DBS says it is the first bank in Singapore to come up with such an arrangement, and it hopes home buyers can benefit from a lower Sibor rate at less volatility.

Yesterday, the three-month Sibor was 0.34917% while the one-month Sibor was 0.21806%

Home buyers who take up a mortgage insurance called My Protector Mortgage get to enjoy lower spreads on the floating-rate home loans.

For instance, for the three-month Sibor package, the spread is 0.85% for someone who signed up for the mortgage insurance, versus 1% for someone who did not. Nevertheless, both will be covered by the three-year 1.49% interest rate cap.

The mortgage insurance is underwritten by Aviva and will pay for the outstanding mortgage commitment in the event of death or terminal illness of the insured borrower.

DBS is also offering three-year fixed rate home loan. Home buyers who take up the mortgage insurance on top of this will pay a rate of 1.38%, which the bank says is the lowest in the market. The fixed rate is 1.48% without the mortgage insurance.

After the first three years, the rate for this product is pegged to the three-month Sibor plus 1.25%.

Home loan rates have come under scrutiny recently as interest rates in Singapore fall. Sibors have been low, largely a result of loose monetary policy in the US. The three-month Sibor, for instance, has dipped considerably from 0.43751% at the start of the year.

Swap Offer Rates (SORs) have even turned negative, prompting some banks to stop offering home loans pegged to them. The three-month SOR was -0.05104% yesterday.

Falling interest rates have triggered concerns about banks’ net interest margins, although analysts are keeping a closer eye on how a potential slowdown in the economy could impact banks; businesses.

Source: The Business Times

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Tags: interest rates / sibor / sor

Even Sibor is now at record low!

- August 16, 2011 No Comments

One of the main benchmark interest rates here fell by nearly 20% to a record low of 0.36% last week, after hovering around 0.44 for a year.

The three-month Singapore inter-bank offered rate (Sibor) or interbank rate is a widely used reference point for loans such as mortgages.

Local interest rates have plunged to all-time lows, following the US long-term debt rating downgrade, as well as a pledge by the US Federal Reserve to keep US rates at rock bottom levels till mid-2013.

This has led to fund inflows from investors looking to havens such as Singapore.

In another first, the other commonly used benchmark, the swap offer rate (SOR), fell below zero last week. Yesterday, it was at -0.0981, slightly up from its record low of -0.69870 last Thursday. While this may give borrowers more reason to cheer, analysts caution that such low interest rates may not be good for the economy in the long run.

UBS chief investment strategist for Singapore Kelvin Tay said cheap loans may mean the property market is too buoyant.

HSBC chief economist Leif Eskersen said he does not think that rates are likely to rise in the near future. OCBC economist Selena Ling agreed, saying that she expected short-term Sibor to remain low.

Local banks have not declared any plans to increase spreads – the gap between the cost of funds and the rate at which they are lent to customers. A DBS Bank spokesman said the bank has not increased the spread on Sibor loans, and would “continue to price loans based on the tenure and size of the loan, as well as the credit risk rating of our corporate customers”.

Maybank consumer banking head Helen Neo said spreads for Sibor loans had not gone up. The bank uses Sibor mainly for home loans.

HSBC’s head of retail banking and wealth management, Mr Paul Arrowsmith, agreed, saying: “HSBC is monitoring the market situation closely to ensure that our package remains competitive.” Currently, the bank only offers Sibor-pegged loans.

However, analysts do not think the low interest rates and moderating loan growths will substantially affect the local banks’ net interest incomes in the third quarter.

Source: The Straits Times

The falling Sibor rates is good news indeed, especially to the wife and I who have recently taken up a home loan pegged to Sibor (and were red in envy when SOR went negative!).

However, we cannot help but wonder if our banks will start pulling back on Sibor-linked home loans if such rates are to go negative too (unlikely scenerio but will you bet against it happening?), much like what they have done with their SOR packages.

So back to the good old days of fixed-interest loans, maybe...?
 

Tags: interest rates / sibor / sor

Say goodbye to SOR-pegged home loans soon?

- August 12, 2011 No Comments

A number of mortgage brokers have received word from two banks to stop offering home loans pegged to Swap Offer Rates (SORs), BT has learnt. Another bank, too, has introduced a new clause into offer letters setting a floor for the SOR used in its home loans.

All these are taking place at a time when SORs for certain time periods have turned negative. The three-month SOR reached a new low yesterday, dropping to -0.6987 from -0.0119 on Wednesday. The six-month SOR also fell further to -0.99258 from -0.06622.

The SOR represents the synthetic cost of borrowing Singapore dollars, by borrowing US dollars for the same maturity and swapping these in return for Sing dollars.

Unusual market conditions have forced SORs into negative territory. Economists attributed this to fund inflows – investors have flocked to safe havens such as Singapore especially after the United States lost its triple-A rating. The expected appreciation of the Sing dollar against the greenback has also pushed SORs down, they said.

Negative SORs put banks which offer SOR-linked home loans in a difficult position. Banks typically set mortgage rates at a spread above the three-month SOR. The lower the SOR, the less they earn.

“I think the banks will shift away from SOR-plus mortgages given the increased volatility that’s been seen,” said Bank of America Merrill Lynch economist Chua Hak Bin.

Some mortgage brokers told BT yesterday that they received notifications from DBS Group and Maybank to stop offering SOR packages from the banks, with immediate effect.

DBS did not confirm this, but a spokesman said: “SOR-pegged loans are not part of our standard offerings. In view of their inherent volatility and the long-term nature of mortgage loans, such products are deemed unsuitable for retail customers who buy residential property for owner occupation.

“As such, they form a very small part of our portfolio and are usually offered upon customer’s request. Our terms and conditions do allow the bank to introduce a minimum or floor rate for such benchmarks.”

The bank also said that its floating home loans are mainly tied to the Singapore Interbank Offered Rate (Sibor).

As for Maybank Singapore, its consumer banking head Helen Neo said: “We currently do not offer SOR-pegged loans.”

Just a few months ago in April, Maybank has introduced a new package called the ceiling-rate home loan that is pegged to the three-month SOR.

The bank launched it together with another product called the hybrid-rate home loan, which is pegged to either the Sibor or a fixed rate in different years. Ms Neo said yesterday that the hybrid-rate home loan is now the bank’s most popular one.

Some banks had moved earlier to withdraw SOR-pegged home laons from the market.

According to a United Overseas Bank spokesman, the bank stopped selling SOR-pegged packages with effect from Aug 1 and introduced Sibor-pegged packages to meet customers’ demand for a less volatile reference rate”.

On the other side of the fence is Australia and New Zealand Banking Group (ANZ), which will continue to offer SOR-linked home loans. However, it added a new clause to offer letters issued from yesterday, setting a floor of 0.1% for the SOR used. This is to “ensure greater clarity on our pricing structure”, said ANZ Singapore head of retail banking and wealth management Philip Lim.

ANZ’s home loans are either pegged to the three-month Sibor or SOR. The rates are based on those fixed on the first business day of the month, so the recent negative SORs have not affected home loan rates, Mr Lim said.

“We are currently comfortable to continue offering SOR-pegged home loan packages,” Mr Lim added.

Source: The Business Times

When the wife and I said yesterday that we are unconvinced about the sustainability of the depressed SOR rate, we certainly did not expect it would come in the form of our banks pulling the plug on SOR-pegged home loans.

While we can barely appreciate the need for banks to set a floor for the SOR used (although we reckon it has more to do with protecting the banks’ bottom-line rather than “ensuring greater clarity on the pricing system”), we are absolutely astounded by the reasons given by banks that have stopped offering SOR packages.

If banks have stopped selling SOR-pegged packages because they are listening to customers’ demand for a less volatile reference rate, why was the decision to terminate made only when SOR started to plummet and eventually gone negative?

And if SOR-pegged loans are indeed unsuitable for property buyers who buy residential property for owner occupation (supposedly due to their inherent volatility and the long term nature of mortgage loans), maybe the Monetary Authority of Singapore should consider outlawing banks from offering such packages for residential home loans?

We recall a time not that long ago (when the USA was still triple-A rated and SOR was positive) whereby some banks will only offer home loan packages linked to SOR. And if you ask for other non-SOR packages, it will be met with great reluctance and at much higher interest rates.

After the dust is settled and SOR starts to climb again, it will be interesting to hear the kind of “justifications” that banks will come up with to restart their SOR-pegged home loan packages again…

Watch this space!

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Tags: interest rates / news / sibor / sor

SOR has gone negative...but for how long?

- August 11, 2011 No Comments

Borrowers cheered yesterday as the swap offer rate (SOR), a benchmark interest rate that mortgage rates are commonly pegged to, fell below zero for the first time.

In a historic moment for Singapore’s banking industry, the three-month SOR plunged to -0.0119%.

The SOR, which is fixed by the Association of Banks in Singapore daily, represents the average cost of funds that banks in Singapore use for commercial lending. It also factors in exchange rate movements.

Traditionally, the SOR is more volatile than the Singapore inter-bank offered rate (Sibor), which is the other benchmark interest rate in Singapore.

A negative rate is startling because in economic theory, it implies that banks are so flush with cash that they now charge a “fee”- as opposed to paying interest – for accepting deposits.

Bankers said yesterday that this is happening because investors are switching out of the US dollar, and there are increased cash flows into Singapore.

The Singdollar to US dollar exchange rate also affects the SOR. With a weakening greenback, the SOR will continue to fall.

Banks here typically peg their loan packages to the Sibor or SOR, plus a profit margin.

But don’t expect banks to end up paying their customers to borrow from them.

OCBC Bank and UOB, which have loans packages pegged to the SOR, have said that there are clauses to “floor” the rates at zero, even if the SOR is negative.

Still, Mr Vinod Nair, chief executive of website Smartloans.sg, which offers home loan comparisons, said: “I think now is a great time to refinance home loans, and I don’t expect the SOR to rebound in the next few years, so there should not be an issue with volatility.”

Home owners taking up new Sibor-pegged property loans pay between 1% and 1.33%, while loans pegged to the SOR may end up paying between zero and 0.6% with the new SOR rates, he noted.

Indeed, some economists believe that SOR rates are likely to remain low for a while yet.

UOB economist Chow Penn Nee said some factors that will keep interest rates low include the United States Federal Reserve’s announcement that interest rates will be kept low until mid-2013.

Also, with the Monetary Authority of Singapore’s current monetary policy stance of a Singdollar appreciation, the US dollar is likely to fall against the Singdollar.

This will mean even more funds flowing into Singapore, which still has a triple-A rating and is considered an alternative to the US dollar.

Mr Saktiandi Supaat, Maybank’s head of forex research, said: “we may see a rebound if there is some intervention by the MAS or if the forward rate changes due to market developments. But given the already low SOR rates we are seeing over the past year or so at around 0.2%, the rebound may not be so soon.”

Barclays Capital economist Leong Wai Ho, on the other hand, does not think that the depressed SOR will persist.

He said: “This is not considered equilibrium, and can’t last too long. It counters the macro-prudentials that have been put in place to lighten property speculation.”

“I think this may be an MAS move to discourage fund flows into Singapore. It may last for two weeks, until we get over the phase of our lives that we are worried about the US downgrade.”

Source: the Straits Times

Unfortunately, the home loan that the wife and I took up recently is pegged to Sibor. And without sounding like sour grapes here, we tend to agree with Mr Leong about the sustainability of such depressed SOR rates. However, it does provide some cheers at least to consumers and probably a temporary respite to some home owners. This is especially after the slew of bad news we have been hit with recently - the continual “bloodshed” seen in the stock markets and technical recession looming for the Singapore economy.  

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Tags: interest rates / news

Low interest rates: How much lower and for how long?

- July 12, 2011 5 Comments

The article below first appeared in last Friday's edition of the TODAY paper.

After reading the report in The Straits Times today about our local banks offering rock bottom rates for selected new projects, the wife and I felt it apt to revisit the TODAY paper's article:

Will history repeat itself?
These days, when I am asked in casual conversations about the local housing market, I am at a loss for words.

Do I describe the market assuming that housing interest rates remain as they are, which has been abnormally low for about two and a half years now, or do I launch straight into the explanation of rates and describe how they have been underpinning the entire property market today?

Either way, the listener is bound to be misled or confused as he is expecting me to just talk about demand and supply.

However, what drives our market today is not simply demand and supply but interest rates - or the cost of money - as well. Increasingly, the market may continue to rise or correct just on interest rates alone - neither supply, nor demand.

But you may ask, what is the big deal about interest rates? When the banks are flush with liquidity, promotional housing loan rates for the first year are very low, sometimes provided at cost. That is, the bank charges you the same rate as it pays its depositor on his or her cash deposits with the bank and earns nothing. That is how much money banks have today.

Such low rates reduce the monthly mortgage payments to almost its minimum. Where previously, households struggled to purchase a million-dollar property, it is now within the reach of many more people - for the first few years anyway, never mind whether these households can eventually pay off the mortgage or not.

In property-obsessed Singapore, many buyers take a short-sighted view: Future problems are tomorrow's problems. Let us focus on today; who knows what will happen tomorrow? Prices may shoot up and I can just re-sell my property for a tidy profit.

Not being able to afford the monthly payments or pay off the mortgage is no longer an issue. This isn't a problem if this is limited to only a few households, but if the majority of buyers act this way, who do owners sell onwards to?

So many more people than before own more than a single property these days. But who really owns all these new property purchases? For the next few years at least, in reality, it is still the bank.

What about renting it out if you cannot sell it? Again, low interest rates and low holding cost distort market behaviour in the leasing market.

Suppose rental demand is not as buoyant and, as a result, rentals are flat and may even be poised for a correction. But rental yields or returns rise when interest rates fall. This is because the cost to the landlord is falling in terms of having to pay less in terms of interest cost on his housing loan. And rates may be falling faster than rentals are correcting.

So, what is the correct decision - to buy or not to buy? The people closest to the prospective buyer, namely the housing agents and bankers, are not likely to give sound advice or even warn of future potential pitfalls, because they depend on the commission from the purchase for their bonus.

What comes down, can go up
Those of us who are not swayed by the transient allure of the low-interest rate environment try to warn of the dangers of a potential sharp interest rate hike but this advice is falling on deaf ears.

If you trace the recent history of interest rates, there was also a bout of low rates occurring in 2002 up to the middle of 2004 (see chart).

However, the rates were not as low as today's and not as consistently flat as today's. It is almost like the animal that is the interest rate, no longer has a heart beat.

Also only a few seasoned property investors remain who remember the period - towards the end of 2007/start of 2008 - when interest rates rose not only sharply but almost to a new high.

Many multiple-property investors and speculators then were having sleepless nights. For those living at the edge or those highly geared, one by one, the properties went until they were left with just the roof over their heads.

Out went the luxuries, the fancy cars, the club memberships and so on. The super rich or those with lots of cash reserves were not affected as the spike did not last too long but it was a painful lesson for those whom I can only describe as people who are not there yet, but who aspire to be among the ranks of the rich. It is this group I am most worried about.

For most of the people in this group, this episode is either ancient history or they were not in the market then. If you have spoken to one of the veterans who lived through this traumatic period, you would know that words cannot even begin to describe the panic, desperation and pain they experienced, not just for themselves, but for their families as well.

Source: Colin Tan (Head of research and consultancy at Chesterton Suntec International)

The wife and I can certainly appreciate the warning, after having lived through the "traumatic" period in 2007/2008, where interest rates shot up to almost 4% and watched the monthly loan repayment amount of our two mortgages increasing month after month.

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Tags: interest rates / news

Bank facts sheet on property loan soon? (Updated)

- June 23, 2011 4 Comments

Financial institutions should provide a fact sheet in a standardised format when marketing loans for residential property to consumers.

It should contain information on the tenor of the loan, monthly and annual repayment amounts at different interest rate levels and fees payable, among other things.

In a consultation paper on the proposal, the Monetary Authority of Singapore (MAS) says the fact sheet will help consumers understand that higher interest rates could have severe implications if they overextend themselves.

It will provide, in an accessible form, information essential to a consumer’s decision to take up a residential property loan, including information on how their loan repayments may change under different interest rate scenarios.

Under the proposal, financial institutions will be required to provide the Fact Sheet to consumers when they first enter into a discussion with the consumer on the key features of the housing loan.

MAS says a residential property loan is a long-term financial commitment.

The current low global interest rate environment will not continue indefinitely.

The fact sheet is intended to help consumers understand that higher interest rates could have severe implications if they overextend themselves.

Source: XINMSN news

Update (The Straits Times, June 23^rd):

The move comes amid a surging real eastate market that has seemed to defy four rounds of cooling measures imposed since September 2009.

Some economists have also started flagging the possibility that the ultra-low borrowing rates in Singapore could soon start rising. The 3-month Singapore dollar Swap Offer Rate (SOR), a popular benchmark rate used for home loans, hovers at just 0.2% today, but was at more than 3% just five years ago.

Interest rates have been rising in other markets like Hong Kong and Malaysia. Recently, Bank of America Merrill Lynch economist Chua Hak Bin noted demand for loans here was rising quickly, which could prompt some banks to raise rates.

A sharp rise in rates can add quickly to a borrower's monthly financial burden, given the popularity of loan packages with fluctuating rates.

The ultra-low SOR currently may mean that a borrower with a 35-year, $1 million loan could pay just 1% interest in the first year – working out to a monthly instalment of just $2,823.

But every 1% point increase in the SOR will add more than $500 to the instalments. If the rates rose back to 2006 levels of about 4%, he would end up paying more than $4,300 monthly.

Mr Justin Chiu, executive director of Hong Kong property developer Cheung Kong, also reckons that residential prices here may fall by up to 6% when interest rates begin rising. This could have serious implications for buyers who cannot sell in a falling market, yet have overextended themselves with big home loans on the belief that interest rates will stay at rock-bottom levels.

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