Cheaper home loans in store

Source : Straits Times – 7 Aug 2010

Sibor and SOR, rates that mortgages are pegged to, have fallen

KEY interest rates that determine mortgage levels have fallen steeply, promising cheaper home loans but even leaner times for those with bank deposits.

The rates have been driven down by the economic recovery, which has led to an increased willingness by banks to lend and a flood of cash coming in from foreign investors.

The falling rates have followed the trend of the rates set by the United States Federal Reserve, which continue to be at historic lows. They have also come as the Singdollar has been allowed to strengthen since April.

Both key banking industry rates display the same trend.

The Singapore Swap Offer Rate (SOR), the average cost of funds used by banks for commercial lending, was at 0.304 per cent yesterday. This was up slightly from the 0.298 per cent on Thursday – the lowest in at least 10 years. This rate is used by United Overseas Bank and OCBC to peg their loan packages.

It is a similar story with the Singapore Interbank Offered Rate (Sibor), the rate at which banks lend to one another.

The Sibor, which serves as a handy benchmark for all kinds of rates, was at 0.547 per cent yesterday. It has ranged from 0.524 per cent to 0.563 per cent since May after hovering at about 0.65 per cent for the previous 14 months. DBS, HSBC and Standard Chartered peg their loans to Sibor.

Mr Vinod Nair, chief executive of website Smartloans.sg which offers home loan comparison, said a 0.1 percentage point difference in interest rate for a $500,000 mortgage on a 30-year loan could work out to about $8,000 in total savings.

Stanchart economists, however, project the three-month Sibor to rise to 1.5 per cent by the end of next year and up to 3.2 per cent by the end of 2012.

Mr Dennis Khoo, Stanchart general manager of retail banking products in Singapore and Malaysia, said customers looking for peace of mind and certainty in monthly cash flow should opt for fixed-rate packages instead of floating-rate or Sibor-linked ones.

But customers who feel interest rates will change or fall more can pick Sibor-linked packages, he added.

Economists say the low interest rate climate has created a disincentive to save, encouraging people to take advantage of available ‘cheap money’ to invest in assets like property.

DBS Bank economist Irvin Seah added: ‘There are substantial millions in the region and with Singapore being a financial hub, a lot of money is making its way here.’

CIMB Research economist Song Seng Wun said that given the general global uncertainty, including the risk of a jobless recovery in the US, central banks are in no hurry to raise rates just yet.

‘Rates in the US are similarly low, and low interest rates here might be a reflection of the likelihood that US rates might stay lower for longer than expected,’ he added.