How Does Sibor and SOR work in Singapore housing loans?
In a new launch show-flat, you spoke to a banker and he showed you this package.
|Year 1||0.75% + 3M Sibor||Year 1||0.75% + 3M SOR|
|Year 2||0.75% + 3M Sibor||Year 2||0.75% + 3M SOR|
|Year 3||0.75% + 3M Sibor||Year 3||0.75% + 3M SOR|
|Thereafter||1.25% + 3M Sibor||Thereafter||1.25% + 3M SOR|
Here’s how to interpret the package.
This 0.75% portion is known as the bank’s margin/spread. This is an annual rate.
It will not change unless the bank invokes Interest rate review clause (some banks called it Right to Review). The banks usually will not invoke this clause unless repayment has not been on time frequently or there is a change in financial standings (e.g being sued for bankruptcy).
The simple logic behind this is, the bank has already lent out this amount of money, if this borrower fails to pay on time frequently (e.g late every other month), it could mean the borrower might be in a tight financial situation, and the risk of this borrower defaulting on his loan is higher now, so the bank wants to charge a higher interest for this higher perceived risk. This is apart from the property being a collateral in the loan. The bank may increase the bank’s margin or change the entire loan package altogether and the bank need not give you any reason for invoking this clause.
For Sibor packages, Banks are competing against each other on this margin portion only.
Lets look at year 1 rate: 0.75% + 3M Sibor. Let’s assume your housing loan is disbursed in September 2015, and the 3M sibor rate is 1.07% (rounded to 2 decimals). 3M would means 3 Months
This 3M sibor rate 1.07% is also an annual rate. Any bank loan package that mentions Sibor or SOR, would refer to the same Sibor published by ABS. there is no individual bank Sibor rate.
Year 1 : 0.75% + 3M Sibor = 0.75% + 1.07% = 1.82% (annual rate)
Monthly interest charged is 1.82% / 12 months = 0.152% (rounded up)
For a $500,000 loan, monthly interest works out to be $760. Monthly installment amortized over a 30 years loan tenure is $$1,803 per month. So your monthly installment of $1803 is split into Principle repayment $1,043 Interest Payment $760.
As the package is based on 3 month Sibor, this means your interest rate will not change for the next 3 months (i.e September, October, November). After the 3 months cycle is up, the bank will take the new Sibor and compute the same way again. If the package is on a 1 month Sibor, the interest rate will change every month based on the same computation method.
What is thereafter rate?
In the package shown above (4 tiered package), it would refer to the year 4 rate onward. Some bank packages have 6 tiered (year 1-5 and thereafter).
(Mortgage tips: if the banker did not show you the year 4 or thereafter rate, or, the banker is only focusing on promoting the initial year 1-3 rate, it could mean that the thereafter rate is higher than other banks. It is important to look at the entire package in totality when choosing a package)