A mortgage is a debt instrument, secured by the collateral of a specified real estate, that the borrower is obliged to repay over an established term. Services and individuals use loans to make big real estate purchases without paying the entire amount in advance out our their own pocket.
In a home loan, a homebuyer pledges their house to the bank or the lender, which then has a claim on the house should the homebuyer default on paying the loan. In the case of a foreclosure, the lender may evict the house’s lessees and also sell off the home, eventually utilizing the income from the sale to remove the mortgage financial obligation.
There are many types of mortgages in Singapore. In this article, we will list the five most common ones that many Singaporean homeowners should be more familiar with:
1. Fixed Price Mortgages
Your home loan interest rates are fixed to a certain percentage for a specific period (usually from 1-5 years). At the time of writing, funding interest rate bundles hover around 2 percent plus, depending upon the timeline that you fixed your home loan/ mortgage plan. Fixed rate packages offer you the interest rate assurance to pay a fixed quantity of instalment, month-to-month, no matter what the market interest rates may be. Hence, it offers you predictability as well as stability in regular monthly instalments.
The downsides is that it has minimal flexibility in complete or partial redemption of your home mortgage/ home mortgages. You will be locked in for the tenor of your mortgage package. Some financial institutions, however, might include a penalty waiver benefit if the redemption is because of the sale of the property.
2. SIBOR Pegged Mortgages
SIBOR represents the Singapore Interbank Borrowing Deal Rate. It is a transparent interbank interest rate that banks charge to borrow from each other. SIBOR allows customers to recognize precisely what the interbank market interest rate is and also the interbank expense of loaning. The rate is publicly available in Business Times, Teletext and the internet.
The SIBOR price can be found in tenor terms of 1/3/6/12-month period with many financial institutions in Singapore offering mortgage or commercial industrial mortgages in either the 1-month or 3-months tenor. A longer term tenor generally includes a higher interest rate.
Additionally, banks charge a certain margin spread over the dominating Sibor Price for the final accumulated mortgage rate (eg. 3M SIBOR + 1%).
3. SOR Pegged Mortgages
SOR means Swap Deal Price. The Swap Deal Price is a United States dollars funding device. As the name “swap” suggest, in layperson terms, it implies the switching of SGD funds for USD dollar funding at a certain cost (which is the SOR price) for a specific tenor (1/3/6/12 months).
There may be certain financing advantages with SOR, especially during a time when the United States Federal Reserve FED Fund rate was between 0–0.25%. Nonetheless, given that the funding is USD based, volatility in the fx (FX) market can account for the motion of the SOR price. In comparison to the Singapore Interbank Loaning Offer Rate (SIBOR) which is SGD financing, the foreign exchange (FX) will certainly have very little impact on it.
Like SIBOR, the banks charge a certain bank margin spread over the prevailing SOR Rate for the last aggregate mortgage price (example 3M SOR + 1%). However, by 2021, SOR may no longer be available as an offering due to the ending of Libor. Instead, it will be replaced by another type of rate called Singapore Overnight Rate Average (SORA).
4. Board Rate Mortgages
The Board Rate pegged mortgages are mortgages offered at the bank’s very own interior interest rate mechanism. Unlike SIBOR or SOR, there is minimal transparency as to just how banks come up with board rate number and rates for your mortgage/ home mortgage. As this is not as clear, some banks have eliminated the Board Rate secured practice while some have actually taken on a typical universal Board Price system for higher transparency. In the current years, we have actually seen the Board Price pegged to variable plans to be fairly stable and may supply customers better value as a mortgage alternatives.
5. HDB Housing Loan Mortgages
An existing HDB bank real estate finance alternative that is meant only for HDB property purchases. It can provide homeowners with comparatively competitive prices. It doesn’t mean that it is not subjected to changes, however. HDB rates are pegged to current CPF rates plus an additional 0.1%.
Currently, HDB rates are higher than bank mortgage interests. However, a homebuyer that has taken up a HDB housing lending may select to re-finance his or her home financing to banks to appreciate more affordable rates.
Part of managing your mortgage comes from choosing the right kind of mortgage for you. The cheapest rate that you see may not be the most suited; variations like lock-in period, rates after lock-in, and your current financial standing play a part in the whole equation. Therefore, it is best for you to contact a mortgage advisor who has your best interest at heart. Get in touch with one right now!
About The Author
Shamir has more than 8 years of banking experience across various areas in Retail, Corporate and Private banking (including Islamic finance) for one of the largest banks in Southeast Asia. In Corporate Banking, he was involved in structuring loan transactions for real estate developers and REITs. He also worked with private bankers to provide credit solutions to their high net worth clients.