June 15, 2008

small change

Choose the right mortgage deal to save more

By Grace Ng Finance Correspondent

You are what you write - if you are a journalist.

After a while, friends start to label you by certain stories you write. Last week, one blithely introduced me to his mother as 'Grace Ng, the Transparent Mortgage Rates Reporter'.

That bizarre introduction unleashed a torrent of questions from Mrs X, who was about to refinance her fixed-rate mortgage. She was counting on the discomfited Miss TMRR (yours truly) to tell her exactly why 'everyone says a transparent-rate mortgage is the cheapest'.

The encounter made me realise that even some financially savvy Singaporeans might not be clued in on how to make the most of mortgage packages as interest rates change.

When rates head south, you can benefit by taking up a mortgage linked to publicly available rates such as the Singapore Interbank Offered Rate (Sibor). This benchmark rate is used by banks to determine mortgage rates for home loans, as it is the cost at which banks borrow funds from each other.

Banks such as United Overseas Bank, OCBC and Standard Chartered offer packages with rates linked to the Singapore Swap Offer Rate (SOR), which is made up of the Sibor plus lending costs incurred by the banks.

The three-month Sibor has been falling steadily, dropping from over 3.5 per cent last year to as low as 1.24 per cent in late April this year. This means some customers have been enjoying rates of about 2 per cent for the first few months of their loans. Not surprisingly, many customers have either taken up new Sibor-linked packages, or refinanced from a fixed-rate package to a Sibor-linked one.

But if rates are high and look set to climb higher, it is best to lock in a rate through either a fixed-rate mortgage for a few years, or at least a rate linked to the 12-month Sibor, which is fixed for a full year.

The three-month Sibor was gyrating within a tight range but is now climbing to about 1.43 per cent. The 12-month Sibor has moved up sharply to 2 per cent.

Singapore rates track the United States Federal Reserve rate, currently at 2 per cent. But the latter looks unlikely to climb sharply in coming weeks. Opinions are divided over whether the Fed will raise rates to curb inflation or lower them further to stave off a deep recession in the US.

So what do you do when rates in both the US and Singapore are relatively flat, the local property market is softening and the economic outlook is uncertain?

It depends on the type of customer you are.

New home-buyers will face higher fixed-rate mortgage prices. This is because local and foreign banks alike jacked up their rates last week to an average of about 3.7 per cent annually for three years.

This raises the cost of locking in mortgage rates for several years. It also makes packages with rates linked to the Sibor, which is still relatively low, look more attractive than fixed-rate loans.

If you are an existing customer with a loan whose value is less than $300,000 and you switch to a lower-rate loan, penalties such as cancellation fees could wipe out any savings from refinancing, notes Mr Bryan Ong of mortgage consultancy

But if your loan value far exceeds $300,000, you could still save a great deal by sticking with a Sibor-linked package until the three-month Sibor exceeds 2.5 per cent to 3 per cent, he added.

Many will remember that, just a year ago, such packages were actually more costly than fixed-rate ones. In June last year, for instance, when the 12-month Sibor was 2.56 per cent, DBS' package stipulated 3.81 per cent for the first year, which factored in a mark-up of 1.25 per cent added by DBS.

Those looking to sell their investment properties in the coming months might want to keep to a three-month SOR loan until they offload their properties, as shorter-term rates are currently lower than long-term ones.

But for those taking a wait-and-see attitude, it might make more sense to take up a 12-month Sibor-linked package, so as to lock in the current low rates. That could give you some peace of mind until the middle of next year, when it will probably be clearer just how bad the economic slowdown in the US and Asia is likely to get, and where rates are headed.

Banks are now differentiating their products by varying the lock-in periods and the penalty fees for cancelling a package within the first year. Some banks offer rates as low as 1 per cent of the total loan quantum, while others charge up to 2 per cent.

Others, like Standard Chartered, have introduced interesting features such as a guarantee that the three-month SOR will not exceed the 2.98 per cent annual rate for the first two years.

Singaporeans like Mrs X will always be quick to leap after the cheapest rate in town. But rather than just eye-balling the current teaser prices, customers should also scrutinise the general rate trends, as well as cancellation penalties, to make sure they get the best package, be it a fixed or floating rate mortgage, all year round.

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