There are two main types of home loans in Singapore market today. The first is pegged to the Singapore Interbank Offered Rate (SIBOR), whereas the second is the Fixed Deposit Home Rate (FHR).
Which of the two should you choose? Here’s a rundown on how to pick:
What is SIBOR?
The Singapore Interbank Offered Rate (SIBOR) is the interest rate at which banks lend to one another, and is used as a base rate in mortgages. The SIBOR rate is derived only after a comparison of interest rates between at least 12 banks (this process is regulated by the Monetary Authority of Singapore).
The SIBOR rate is expressed as 1M SIBOR, 3M SIBOR, 6M SIBOR, and so on. The number indicates the period in months at which your loan rate is revised.
For example, if your loan rate is based on 3M SIBOR, your home loan interest will be revised every three months to match SIBOR. If it is pegged to 1M SIBOR, then it is revised to match SIBOR every month (which probably means your home loan interest will change from month to month).
In general, the longer the period, the higher the rate will be – you are effectively paying for the benefit of a more consistent rate.
A SIBOR home loan consists of two parts: the bank’s spread + the SIBOR rate.
For example, a SIBOR rate package could have a rate of 0.76% (the bank’s spread) + 3M SIBOR.
If the 3M SIBOR rate is 0.86%, the above quoted rate would be 0.76% + 0.86% = 1.62%.
As an example, here are the SIBOR rates for the month of July:
| 1-mth SIBOR | 1.880% |
| 3-mth SIBOR | 2.000% |
| 6-mth SIBOR | 2.060% |
| 12-mth SIBOR | 2.190% |
What is FHR?
The Fixed Deposit Home Rate (FHR) is a form of board rate which is fixed by the bank, instead of by external market conditions. The FHR rate pegs your home loan to the bank’s fixed deposit rates.
FHR rates also have a number next to them, most commonly FHR9 and FHR36. Again, this refers to the interest rate period – whether you are given the 9-month fixed deposit rate (FHR9), or the 36-month fixed deposit rate (FHR18).
The interest rates of FHR loans are pegged to a particular tranche of fixed deposits. This means the banks are forced to pay out to its fixed deposit holders more, preventing the bank from spiking its rates.
Today, FHR loans are more common than traditional SIBOR loans.
As with SIBOR, the final rate for your home loan is a combination of the bank’s spread plus the FHR rate.
Which is Better: SIBOR or FHR?
SIBOR is more volatile than FHR – SIBOR rates move up or down in bigger increments (and more often) as compared to fixed deposit rates.
For example, the 3M SIBOR rate is quite often hovering around the 3% mark, if you measure it over a long span such as 20 years (although in the past decade, it has been unusually low since 2008 due to the Global Financial Crisis).
However, there have been periods such as in 1990 or 1998 when the 3M SIBOR rate shot up to almost 8%.
SIBOR rates also fluctuate much more. A bank’s fixed deposit rate may not change for quite a long time, but SIBOR rates can move up or down very quickly in the space of a few days or weeks.
Besides volatility, there is one more factor to consider: banks have more control over fixed deposit rates.
No bank can “control” SIBOR rates – the bank can raise or lower their spread, but the actual SIBOR rates are still derived from at least 12 banks. It is the free market that sets the rate.
With FHR rates, however, a bank has more control. Overall, a bank is inclined to keep fixed deposit rates low, because the higher the fixed deposit rates, the more interest the bank must pay. For this reason, FHR rates tend to move very little as compared to their SIBOR counterparts.
In Conclusion, FHR Rates Are Better If You Prefer to Play It Safe
The main advantage of SIBOR loans is that when they fall, they can fall much faster than their FHR counterparts. Borrowers who choose to brave SIBOR rates can potentially save a ton when SIBOR rates start to plummet. Borrowers with FHR rates, however, are unlikely to experience this type of windfall.
On the other hand, SIBOR rates are quicker to rise as well, thus potentially costing their borrowers much more. FHR rates rise less frequently, and in smaller increments – their borrowers are spared the shock of suddenly skyrocketing interest rates.
Overall, borrowers who need predictability in loan repayments (e.g. those who pay their home loan with cash instead of CPF) are better off with FHR loans. Borrowers who aren’t put off by fluctuating rates might want to take their chances with SIBOR.
This article was republished with permission from SingSaver. SingSaver is a personal finance comparison platform which provides free, quick and easily accessible resources to help consumers understand personal finance products in Singapore; including credit cards, personal loans and travel insurance.
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