December 13, 2008 Saturday

Lower Sibor attracts more home buyers

0.9% rate sees more interest but analysts warn of risks

By Gabriel Chen

INSTALMENTS for many home loan borrowers are set to fall after the all-important interest rate at which banks lend funds to one another nosedived to about 0.9 per cent this month.

Many home loan packages are pegged to this rate - known as the three-month Singapore Interbank Offered Rate (Sibor) - so when it goes down, so do Sibor- linked home loan instalments.

According to economists, the three-month Sibor should remain at these depressed levels into the new year.

OCBC Bank economist Selena Ling said the three-month Sibor is reacting to a couple of factors.

One is the widespread market expectation that the US Federal Reserve will cut its Fed funds target rate to 0.25 per cent from 1 per cent at its meeting on Tuesday.

The Sibor closely tracks this rate.

Another factor: continued measures by the Singapore authorities to pump liquidity into the system, against a backdrop of global and domestic recession.

In September, the three- month Sibor spiked to 2 per cent as the global credit crunch hit home here. Banks were afraid to lend to one another for fear of not getting repaid.

With the rate coming down sharply, more and more home buyers are looking at Sibor- linked loan packages.

Mr Geoffrey Ying, head of the mortgage division at financial advisory firm New Independent, estimates that six out of every 10 customers he is seeing are enquiring about Sibor-linked packages not only for high-end units, but also for HDB flats.

A year ago, when Sibor was significantly above 1 per cent, only three or four customers out of 10 would show interest.

It is easy to see why Sibor- linked packages have become the talk of the town, given the potential savings.

Suppose you want to buy an HDB flat. The best rate in the market is the 2.6 per cent annual rate for those qualifying for an HDB concessionary loan. This rate is pegged at a level 0.1 percentage point above the prevailing CPF ordinary account interest rate.

By comparison, at Standard Chartered Bank, for example, if you choose a two-year lock-in, its Sibor-linked package works out to Sibor plus a spread of - in this case - 0.95 per cent.

So if three-month Sibor stands at 0.9 per cent, you pay an annual rate of 1.85 per cent - lower than the HDB concessionary rate.

Still, financial experts say homebuyers must be careful. When Sibor falls, borrowers with a loan pegged to it gain as they will be paying a lower interest rate. But conversely, if the benchmark rate heads up, mortgage instalments also rise.

'We think though, that Sibor still has the potential to spike up, given that risks still remain out there,' a United Overseas Bank spokesman said.

Borrowers need to think carefully about choosing between two loan options, experts say.

Since January 2003, when banks were first allowed to provide loans for HDB flats, many homebuyers have opted for Sibor-linked packages as Sibor was very low, said Mr Leong Sze Hian, president of the Society of Financial Service Professionals.

In June 2003, the three-month Sibor bottomed out at 0.5625 per cent, but then surged to as high as 3.56 per cent three years later.

Mr Leong said that historically, the HDB rate of 2.6 per cent has been lower than rates for Sibor-linked packages.

More importantly, homebuyers with an HDB concessionary loan who switch to a bank loan cannot go back to the HDB if bank rates suddenly rise above the board's 2.6 per cent concessionary rate.

Experts think that banks are far more inclined than the HDB to repossess properties in the case of loan default.

'During the economic slowdown, there'll be people who'll struggle to meet monthly payments. Sure, Sibor- linked rates are low now, but if you want certainty, you'll choose HDB's,' said Mr Patrick Lim, associate director of financial advisory firm PromiseLand.

Take Mr David Lee, for instance. The 35-year-old engineer said that even though he is paying more now because he chose an HDB concessionary loan, he is not going to switch to a Sibor- linked package any time soon.

'I don't mind the slightly higher rate for peace of mind,' he said.

Mrs Ong-Ang Ai Boon, director of the Association of Banks in Singapore, is on record as saying that 'repossession would be a last resort, after all other measures have failed'.

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Why Sibor is down

# There is widespread market expectation that the US Federal Reserve will cut its Fed funds target rate to 0.25 per cent from 1 per cent at its meeting next Tuesday. Sibor closely tracks this rate.

# Continued measures by the Singapore authorities to pump liquidity into the system.