SINGAPORE – Some home owners who had taken up floating rate loan packages may face a reality check as mortgage rates threaten to go through the roof.
Experts note that they could encounter issues switching to a fixed-rate package, with some banks such as Maybank and Standard Chartered axing such offerings in recent months.
DBS, Singapore’s largest lender, removed its five-year fixed rate HDB package on Tuesday (June 28).
Home owners who fear rates will move up very fast want to go back to fixed rates, said Mr Lee Meng Choe, executive director (advisory) at financial service firm Gen Financial Advisory.
The hitch is that they are stuck because fixed-rate mortgages still available from banks are now higher than the rate for an HDB loan, which is pegged at 0.1 percentage point above the Central Provident Fund Ordinary Account rate of 2.5 per cent.
And they cannot go back to the HDB after having taken out a bank mortgage.
These people have a choice of fixed, floating or hybrid packages.
The Straits Times ran the rule over the loan packages offered by the three Singapore banks, assuming a mortgage of $500,000 over 25 years.
If borrowers took a DBS two-year fixed-rate package at the current rate of 2.75 per cent, their monthly instalment would be $2,307.
An OCBC or UOB two-year fixed-rate package at 2.65 per cent would have monthly instalments of $2,281.
So the DBS package is $26 more a month.
Fixed-rate mortgages have shot up since the fourth quarter of last year when three-year fixed rates were at 1.15 per cent. They have gone as high as 2.75 per cent, a jump of 1.6 percentage points.
So would fixed-rate packages still be suitable for some borrowers?
Mr Lee said fixed-rate packages suit those on stable incomes and who do not like risks or uncertainty.
A fixed rate also makes it easier for a home owner to do household budgeting: There is a fixed sum to pay every month, so that can be factored into a budget.
But Ms Maryanne Phua, head of home loans at OCBC Bank, said fixed-rate packages usually come with pre-payment penalties if the loan is redeemed or prepaid within the lock-in period.
Ms Phua said home owners should consider this option only if they do not intend to pay down their mortgage or sell their property in the next few years.
If they intend to pay down their mortgage or offload the property soon, she suggests they opt for Sora-pegged floating packages, which come with shorter lock-in periods.
Sora-pegged floating packages are on offer at the three local banks.
Let us assume the same loan amount of $500,000 with a tenure of 25 years.
DBS’ package charges three-month compounded Sora, or Singapore Overnight Rate Average, plus a margin of one percentage point, giving an interest rate of 1.7434 per cent based on June 29 rates and a monthly instalment of $2,057.
OCBC’s package charges one-month compounded Sora plus a margin of 0.98 percentage points, making an interest rate of 1.9471 per cent based on June 29 rates and a monthly instalment of $2,105.
UOB’s package charges three-month compounded Sora plus a margin of 0.80 percentage point. This results in an interest rate of 1.5434 per cent based on June 29 rates and monthly instalments of $2,009.
Mr Lee said floating rates are suitable for those who can tolerate uncertainty and are prepared to shop around for better deals.
He added that home owners who take a floating rate loan need to ensure they can save 10 per cent of their salary every month, which gives them a buffer if rates shoot up.
Mr Clive Chng, associate director of mortgage broker Redbrick Mortgage Advisory, said a three-month Sora package is more stable than a one-month one.
This is because rates for the three-month Sora are locked in for the next three months while the one-month Sora rates change every month.
Mr Lee said there are hybrid loan packages for home owners who do not mind bearing a little risk from a floating rate package while still enjoying the benefits of certainty from a fixed-rate deal.
A DBS package allows home owners to choose a mix of fixed and floating rate deals.
Assume the same loan amount of $500,000 over 25 years. If a home owner chooses the hybrid package with 30 per cent of the loan under the two-year fixed rate and 70 per cent under the floating rate, the blended interest rate is 1.7182 per cent for the first two years, working out to an instalment of $2,052 a month.
“Source: [Fixed, floating or hybrid: Which home loan package works for you as interest rates rise] © Singapore Press Holdings Limited. Permission required for reproduction”
