All about Mortgage

All about Mortgage

  1. What is SIBOR & SOR?
  2. How does SIBOR and SOR work?
  3. How do I choose between SIBOR or SOR?
  4. SIBOR and SOR vs. Bank Board Rates
  5. Bridging Loan
  6. Fixed Rate Loan
  7. Floating or Variable Rate Loan
  8. Interest-offsetting Loan
  9. Interest-only Loan
  10. Reverse mortgage
  11. Reference Rate Loan
  12. Rates are Not everything
  13. How are the loans structured for private properties?
  14. What are the stages of processing a loan?
  15. What are the documents required for application?
  16. What do banks look out for when granting housing loans?


What is SIBOR & SOR?

    The Association of Banks in Singapore fixes Singapore Interbank Offered Rate (SIBOR). It represents the unsecured funds/rates that banks and financial institutions in Singapore lend to each other. Local housing loan interest rates track movements in the Sibor.

    The Association of Banks in Singapore fixes Singapore Swap Offer Rate (SOR). It represents the average cost of funds used by banks in Singapore for commercial lending.

    These rates are transparent for they are published daily in the Business Times.

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How does SIBOR and SOR work?

    In Singapore, most banks offer housing loan packages pegged to either SIBOR or SOR. You can think of it as the “cost price” for the bank. They then add a margin on top of their cost price, this is called a spread. (eg. 3 month Sibor + 1%)

    There are a few different SIBOR and SOR options available. 1 month, 3 month, 6 month, 9 month and 12 month SIBOR and SOR Rates. Generally speaking the longer the term the higher the rate, but the more stable it is. For example, 1 month SIBOR could be at 0.2%, and 12 month SIBOR could be at 1%. However, 1 month Sibor is more subject to fluctuations, and you can expect it to go up and down more frequently. The best option between stability and low rates is generally the 3-month SIBOR or 3-month SOR option.

    3-Months (3-month cycle)
    ✓ Lower base interest rate
    ✓ Applicable rate changes quarterly (volatile)
    ✓ Full redemption notification on the commencement of new cycle

    12-Months (12-month cycle)
    ✓ Higher base interest rate as compared to 3 months
    ✓ Rate is valid for 12 months cycle (stable)

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How do I choose between SIBOR or SOR?

    The decision boils down to your appetite and view on the market in the future.

    If you are investing on a property and know your budget well, it would not be risky to take up a loan that is pegged to SOR, as long as you are not locked in for too long.

    On the other hand, if you are buying a property for occupation, in a long term, picking a loan with fixed rates or maybe SIBOR-pegged rates would be a better choice for you.

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SIBOR and SOR vs. Bank Board Rates

    Board rate loans are housing loans with interest rates that are working off the respective financial institution’s prevailing board rate. When taking up a home loan from the bank, you would have to choose between fixed or floating rate packages. And if you make a choice of floating rates, you have to consider taking up a package that is pegged to SIBOR, SOR or rates that fluctuate according to the bank’s board rate at its sole discretion.

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Bridging Loan

    Bridging Loan is an interest servicing short-term loan (up to 6 months), which serves to help tide over the period between completion of purchase of a new property & receipt of proceeds from the sale of an existing property.

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Fixed Rate Loan

    Fixed Rate Loans are ideal for the consumer who wants to be sure exactly of how much his monthly payment will be and not worry about interest rate changes. This package offers a fixed interest rate for a certain period (usually one year or more), after which it becomes a variable rate loan. It comes with lock-in periods and early repayment penalties. This is a good option to consider if interest rates are low or if you’re a discerning consumer who wants to conform to a fixed repayment budget regardless of varying interest rates.
    ✓ Interest rate is fixed and guaranteed in the first few years.
    ✓ Monthly installment is fixed for this period of time.
    ✓ This is a good option if interest rates are low when you get loan.
    ✓ After the fixed-rate period, the interest rate becomes variable, the loan then works like a floating rate loan.

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Floating or Variable Rate Loan

    Variable-rate loan, a.k.a. floating rate, is better for higher risk threshold customers. This package can save you a lot in interest over the loan period, but your payments will fluctuate up and down with the market. It also allows you a level of flexibility when it comes to switching packages and/or repayment.
    ✓ Interest rate is not fixed but can be varied by the bank.
    ✓ Interest rate is benchmarked against a reference rate determined by the bank.
    ✓ If the reference rate goes up, so will your home loan’s interest rate and monthly installment and vice versa.

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Interest-offsetting Loan

    If you have substantial cash, consider Interest-offsetting Loan. This package basically links your current account to your housing loan where the interest earned in your current account bears the same rate as the one charged on your housing loan while both accounts are administrated separately. By offsetting the interest earned on your current account against your housing loan interest, you can enjoy big savings for your housing loan as it now effectively serves as an interest-free loan. In addition, it gives you an added flexibility of drawing down cash in the current account when you need to do so.

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Interest-only Loan

    If you are a property investor or if you intend to refinance your loan at the end of the loan term, choosing an Interest-only Loan would make good sense. You’ll benefit from savings in income tax as the interest portion of loan installment for investment properties is tax-deductible, this package allows you to maximize tax deduction on interest paid on your housing loan while keeping your monthly installments low and the principal repayments are made only at the end of the loan term. Some Singapore banks offer this option from time to time.
    ✓ Minimize property cash flow instances
    ✓ Increase Returns on Capital
    ✓ Maximize tax deduction on interest on housing loan
    ✓ Lower rental income would be able to cover the lower interest-only installments without any cash top up for the monthly repayments

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Reverse mortgage

    A Reverse Mortgage is a financial scheme designed for senior citizens to unlock the value of their property into cash flows. It allows the property owner, to receive a monthly payout by mortgaging their paid-up or almost fully paid property to the bank without having to move out or sell their property. The concept of reverse mortgage is a relatively new one in Singapore. As more and more Singaporeans head towards retirement, reverse mortgages can be a viable option for the senior citizens as they look for solutions to supplement their income. With longer life expectancy, many senior citizens are concerned about the rising costs of living and reduced income streams during retirement. This is a reality that affects everyone, whether he is a private property or HDB flat owner. For senior citizens who have fully or almost fully paid for their property and want to supplement their income during their retirement, they can now consider a reverse mortgage as an additional option.

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Reference Rate Loans

    Reference rate loans are transparent to the consumer as the rates are publicly available indices. For example, the Singapore Interbank Offer Rate (SIBOR) is a daily reference rate based on interest rates at which financial institutions offer to lend unsecured funds to other financial institutions in the Singapore wholesale money market (or interbank market). SOR stands for SWAP Offer Rate and it is one of 2 exchange-traded interest rate futures products in Singapore. The SOR is an FX forward implied rate calculated from a 3-month USD/SGD forwards with official fixing that are provided for by the Association of Banks in Singapore. For the consumer who wants a variable rate loan and to maintain a certain level of transparency of rates to allow quick decision-making (i.e., when to switch loan packages), he should look out for loans that are pegged to SIBOR or SOR reference rates.

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Rates are Not everything!

    Other than interest rates, other important aspects to look into include:

    1. Transparency and stability of the interest rate.
    2. Historical rate and market positioning of the respective bank.
    3. Proposed rate after the initial promotional period.
    4. Flexibility of the packages.
    5. Features like partial and full prepayment, loan mobility.
    6. Other facilities like gear up term loan, overdraft, business loan.
    7. Limitations like lock-in period, penalty, and claw back.
    8. Freebies and subsidies.
    9. Credit assessment and guidelines of the respective bank.
    10. Approval consideration.

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How are the loans structured for private properties?

    If it is a completed private property, the Normal Payment Scheme applies. You are required to pay the initial 5% in cash. You can then use your CPF savings to finance your loan provided you have enough CPF savings. If there is a balance, the conveyancing law firm proceeds to obtain it from the CPF Board or the bank prior to completion of purchase.

    If the property is still under construction, the Progressive Payment Scheme applies. This is where the developer and the bank determine the payment schedule for the property buyer. The schedule is dependent on the stages of completion of the building project. The payments follow a standard percentage of the purchase price, once the Option to Purchase permit has been received. The scheme ensures that the payment is done upon completion of the development project.

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What are the stages of processing a loan?

    Once you have chosen the most suitable loan package and submitted all necessary documents to the respective bank, they will decide on the loan amount and loan term and come up with a Letter of Offer (LO) within 3 – 7 working days. After you sign the LO, they will start to process the loan. The bank will then issue a Letter of Instruction (LOI) and get an appointed law firm to act on their behalf. This usually takes 7 – 10 working days.

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What are the documents required for application?

    The documents needed for a standard housing loan application are:

    1. NRIC of borrower(s)
    2. Loan application form
    3. Latest income documents (pay slip, Notice of Tax Assessment)
    4. Latest CPF statement showing a 12-15 months history of CPF contributions
    5. Option to Purchase document

    If the application is for refinancing, the additional documents are:

    1. Latest CPF Property withdrawal statement
    2. Last 12 months housing loan repayment statement

    If a bridging loan is required, the additional documents are:

    1. Latest CPF Property Withdrawal Statement of Account
    2. Latest statement of existing loan account (HDB or existing FI),
    3. Proof of confirmed sale

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What do banks look out for when granting housing loans?

    1. Monthly Income
    2. CPF Contribution
    3. Existing funds in CPF Ordinary Account
    4. Other Financial Commitments
    5. Credit Rating (obtained from Credit Bureau Singapore)
    6. Debt Servicing Ability
    7. Litigation Suits (obtained from a Quest Line Search)
    8. Bankruptcy
    9. Employment Profile
    10. Financial Strength of Joint Borrower (if any)
    11. Age of Borrower(s)
    12. Employment profile
    13. Nationality

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*Please note that information provided is as it is basis, whilst every effort has been made to provide up-to-date information. The author is not responsible for inaccuracies or whatsoever as a result from using this information.


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