Demystifying Floating Interest Rates For Every Singaporean Who Aspires To Own A Home

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June 26, 2018
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To own a home is the dream of many Singaporeans. Owning a home is not as simple as it sounds though. From choosing the location to getting a good price to finding the best home loan deals, not a single step is easy. In particular, finding the best home loan deal is the most important because it determines how much your dream home is going to cost you.

Thus, we are here to help you demystify floating interest rates so that you are savvier in striking the best home loan deal and making your dream home cheaper.

Demystifying 3 Types Of Floating Interest Rates That Every Homeowner Should Know

  1. SIBOR

As Singaporeans, we are used to having an acronym for anything that we use in our lives. Thus, even interest rates have its own acronyms. SIBOR, or Singapore Interbank Offer Rate, is the most commonly used acronym. But what really is SIBOR?

SIBOR is an interest rate that banks across Singapore charge each other. Banks have a mandate to balance its books every day. Thus, banks have to make sure that they have a net zero balance at the end of the day. If they don’t, they will have to borrow from another bank. The borrowing bank will have to pay interest rate for lending the amount based on the SIBOR.

While SIBOR is one of the widely used benchmark rates for home loans, not many of us understand how it is set. Here’s how it works. On every business day, 20 contributing banks will each submit a SIBOR rate to the Association Bank of Singapore (ABS) each for 1M, 3M, 6M and 12M maturity. ABS then appoints Thomson Reuters to aggregate and determine the SIBOR rate on its behalf. This explains the fluidity of SIBOR, why it changes almost every day and why it is called a floating rate!

  1. SOR

SOR, or Swap Offer Rate, is a derivative of SIBOR. SOR reflects the exchange rate between SGD and USD given that there are multiple banks that are operating in Singapore. To calculate SOR, you will need to use the expected forward exchange rate between USD and SGD. In general, SOR declines more than SIBOR when rates are going down. However, SOR can potentially outgrow SIBOR when interest rates are going up.

  1. Board Rate

Just like SIBOR and SOR, board rate is also a type of floating rate. Board rate is simply a nicer way of saying that the interest rate is determined by the bank. In most cases, there are some calculation methodology that the bank adopts to calculate its board rate. While they do not just pluck the number out from thin air, they do not have the obligation to disclose how it is determined. Here are 2 examples of bank “Board Rate” Pegging to their very own fixed deposits interest rate.

a) DBS’ FHR

Fixed Deposit Home Rate (FHR) is DBS’ own version of board rate. DBS currently uses FHR8 for all of its board rate pegged home loan. FHR8 refers to the prevailing 8 months SGD fixed deposit interest rate of DBS Bank for amounts within $1,000 to $9,999. At the moment, DBS’ FHR8 is 0.20%.

Because of its board rate nature, DBS has the right to adjust its FHR8 anytime. It can even choose to use the prevailing interest rate on SGD fixed deposit interest for amounts more than $10,000. It is really up to DBS to decide. One reason why FHR is preferred is because it is usually much more stable than SIBOR or SOR. After all, your fixed deposit interest rate barely moves, isn’t it?

b) OCBC’s OHR

Since DBS has its own board rate with its unique marketing, how can OCBC lose out? In order not to lose out to DBS’ smart marketing play, OCBC introduced its own board rate: OCBC Home Rate (OHR). It was initially coined as Fixed Deposit-Linked Home Loan Rate (FDMR) but the similarity with DBS’ FHR might have triggered a rethink.

When OCBC first launched its OHR, it used the long-term average of the 1M and 3M SIBOR. However, it has since clarified and informed the world that it is now a bank-managed rate. In other words, it is just like any other board rate, just that it has a better name. Right now, OCBC’s OHR is set at 1.00%.

Finding The Best Home Loan Deals In Singapore

But more importantly, you need to know where to find the best home loans! Using our proprietary data and comparison tool, you can find the best home loan deal on Moneyline without having to call up 5 different banks. It is unbiased, accurate, saves you time and best of all, it is FREE. Yes, FREE!

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