When buying your dream house, other than investing your time searching for the right property within your budget, you have to study and understand the financial institutions’ (hereafter referred to as “FI”) creative structure of housing loan packages in order to meet your requirements.

Prior to venturing into the pricing packages, it’s better to learn how the pricing structure of these packages. FIs price housing loan packages against the cost of funds and most of them will adopt 3 months Singapore Interbank Offered Rate (Thereafter refers as “SIBOR”’) . The selling and administrative expenses, provision for bad loan and profit margin are added to form the pricing.

In general, there are fixed and floating rate packages. The floating rate packages will fluctuate in accordance with the market trend of fund cost or market interest rate and FI’s pricing policy.

Fixed rate packages refer to interest rates being fixed for a certain period of time, and thereafter revert to a floating rate. In the housing loan letter of offer, the interest rate will be stated clearly with the wording “Fixed” to reflect FI’s commitment to keep the rate remains unchanged during the fixed term despite market condition. Fixed rate package is priced at higher rate as it’s congruent to the FI placing a fixed deposit with you, the longer the deposit term, the higher the rate (It works the same way you place fixed deposit with the FIs). For such rates, the FI will normally impose a prepayment for partial and full repayment during the fixed rate term to preserve their profit margin.

The advantage of fixed rate package is to lock in the interest cost during the fixed term. The borrowers pay a premium to lock in the rate. This will work to the advantage of borrower if the interest rate is trending upward, however, should the fund cost or market interest rate moves sideway or downwards, the premium will consequently be additional income to the FIs.  

As mentioned previously, the longer the fixed term, a higher interest rate will be applied. Currently, the longest fixed rate package available in the market is 5 years. As the fixed rate term is not perpetual, you need to understand the mechanism of the floating interest rate pricing structure despite your preference for fixed rate packages.

Floating rate packages available in the market are broadly divided into five types, namely: Board Rate, SIBOR pegged, SOR pegged, CPF OA rate pegged and Prime Rate pegged.   

Amongst these packages, the Board Rate packages offered by various FIs come under all kinds of fanciful names. It’s very easy to identify them as these are pricing are offered on discount off the Board Rate. This discount will stay unchanged as per the terms of letter of offer, but the Board Rate is subject to FI’s discretion and review. It is less transparent as the FIs may adjust the rate at their own discretion without any reference to market condition. In view of this non-transparent nature, FIs have introduced pricing packages with reference to cost of fund or market interest rate, such as Singapore Interbank Offered Rate (SIBOR) or USD/SGD Swap Offer Rate (Thereafter refers as “SOR”).

SIBOR and SOR are the rates adopted by the FIs here to price the cost of excess funds placed out to other FIs who need them. These rates are determined and published by Association of Banks in Singapore daily. SIBOR is the base interest rate for Singapore Dollars deposit placed within the FIs, and the USD/SGD Swap Offer Rate (SOR) represents the cost of borrowing Singapore Dollar synthetically by borrowing US Dollar for the same tenor and swapping out the US Dollar in return for the Singapore Dollar.

As the SIBOR is a Singapore Dollar deposit rate, it is relatively stable unlike the SOR which is greatly influenced by the US Dollar exchange rate.  Interest rates quoted for both of them are based on tenors of 1, 3, 6, 9 and 12 months. With the advantage of larger deposit base, SIBOR or SOR are usually adopted by the banks to price the housing loans. Most banks use only either 3 or 12 month SIBOR. For banks that use SOR, they usually quote 1 or 3 month SOR. If you choose 3 month SIBOR or SOR, the housing loan interest rate will be reviewed quarterly, and the option of 12 month will mean the housing loan rate is fixed  for 12 months.

SIBOR or SOR Housing Loan packages are quoted with a markup over SIBOR or SOR rates. As a borrower, pay attention to the mark up as it is the FI’s profit margin, risk provision as well as their selling and administrative expenses. The lower the mark up, the lower the FI’s earning margin which means more savings for you. SIBOR & SOR are determined by the market forces on the demand and supply of money.

CPF OA Rate is adopted by POSBank catering specifically to HDB Housing Loan segment. It’s pegged against CPF Ordinary Account interest rate of 2.5% currently. The CPF OA Rate is reviewed by CPF Board on quarterly basis based on the 3 local banks’ average 12 month Fixed Deposit and Savings interest rates on 80/20 basis. If the average rate is lower than 2.5%, CPF Board will pay 2.5% for the balance outstanding in the Ordinary Account as it was gazetted in the CPF Act to pay the minimum rate of 2.5% to its members. The advantage of such rate for the housing loan borrowers is the stability as the average deposit rates have been remaining lower than 2.5% for some time and is likely to stay that way. Indirectly, such housing loan pricing is actually pegged to the average deposit rates of the 3 local banks. As the “Floor” of 2.5% set in the CPF Act, there is no further downside for the Housing Loan rate under CPF OA pegged.

DBS Bank has also tested the market with the housing loan package pegged against Prime Rate. To-date, it’s the only bank offered such package. Prime Rate has been traditionally used by banks to price the products such as overdraft facilities and trade financing.  Prime Rate is also known as Base Lending Rate or Prime Lending Rate. DBS Bank’s Prime Rate of 4.25% pa is the lowest in the market but is higher than the average housing loan pricings. Hence, the housing loan packages pegged to Prime Rate is on discounted basis which is similar to Board Rate packages. Prime Rate is also very stable and it has not been changed for the past 10 years, such stability does not work in favor of borrowers if the interest rate remains low or on a downtrend.

After understanding all the various type of pricing structures, you can make an informed decision based on your risk appetite and hence choose the appropriate type of pricing structure. In our opinion, pricings pegged to SIBOR or SOR are deemed to be the fairer in view of its transparency and the fact that FIs are not in control of these rates, all you need to evaluate is the mark-up over the SIBOR or SOR.

For a complete advice on your housing loan needs, you may wish to contact any of our Housing Loan Specialists at 6100SAVE(7283) for a detail discussion.