In efforts to alleviate some of the economic fallout of COVID-19, the US recently announced the biggest reduction in its Federal Reserve interest rate since the 2008 financial crisis, which could still fall to zero or even the negatives within the upcoming months.
The fed rate cut, has, in turn, sent SIBOR into a steady drop of its own and at the time of writing this in June, the 1-month SIBOR rate stands at 0.25% while the 3-month SIBOR rate is 0.54%, a 10-year low for SIBOR.
These low SIBOR rates are great news if you're considering a home loan because it generally means a lower home loan interest rate for borrowers.
But before you run off to apply for that home loan, you may be wondering what SIBOR is and how it affects you as a borrower.
Here's a little breakdown of what you need to know about SIBOR and how it affects interest rates.
What is SIBOR?
The Singapore Interbank Offered Rate, known in short as SIBOR, is the median interest rate calculated among 12 local banks in Singapore. It's used as a benchmark interest rate for lending between banks in the market.
The reason it's such an important interest rate in Singapore is that many home loans in the country are pegged to SIBOR. It's used as a reference rate to guide banks in determining how to price loans.
For example, a bank which offers a 3M SIBOR + 0.7% rate would mean that the bank is charging 0.7% in interest on top of the current 3-month SIBOR rate. 0.7% would be the spread or premium this bank is going to charge to borrowers on top of the SIBOR rate.
This would mean that over a period of three months, the median interest rate amongst 12 local banks would be the base SIBOR rate plus a 0.7% spread which is added on by the individual bank as its profit margin.
How does SIBOR affect home loan interest rates?
You may still be wondering what any of this has to do with you as a borrower.
Well, SIBOR plays a key role in determining interest rates, particularly for SIBOR-pegged loans. Banks determine how to price loans using SIBOR by using it as a benchmark rate, then adding a premium or spread on top of that which becomes their profit margin.
For example, with a 1M SIBOR + 0.4% rate, the benchmark rate, in this case, is SIBOR, which is not determined by individual banks but by the median rate offered by local banks. However, the bank's spread, which is in this case 0.4% is determined by the individual bank and calculated according to its own parameters.
Hence, you can guarantee that when SIBOR drops, so do bank interest rates for loans they offer. And unless banks decide to adjust their spread in the interest of their profit margins, home loan interest rates are going to continue to stay low or drop even further.
Will interest rates continue to drop?
Using the 2008 crisis as an indicator, all signs point to yes given the current COVID-19 crisis.
On top of that, banks have thus far not reacted by adjusting their spread, meaning that home loan interest rates could continue to drop for the foreseeable future.
That being said, it's unpredictable and banks may still end up adjusting their spread at some point, though it's hard to say when.
What does this mean for you as a potential borrower?
Fixed-rate loans may not benefit
For those of you with fixed-rate loans which you're still paying off, here's the bad news. You won't be able to benefit from a low SIBOR rate with your existing loan.
The whole premise of a fixed-rate loan is to lock you into the interest rate of the time of signing up for the loan, allowing you to avoid the risk associated with it fluctuating.
Because of this, you won't be able to benefit from a dropping SIBOR rate. On the flip side, when SIBOR rates do eventually rise (which they certainly will at some point), you won't be affected by that either.
For SIBOR-pegged loans, on the other hand, this presents a great opportunity for you to reap the benefits of low-interest rates and save big on your future home.
See also: Home loans: Fixed rate vs floating rate packages - which one's for you?
Banks may still adjust their spread
Borrowers who were lucky enough to apply for a SIBOR-pegged loan last year will reap the most benefits since it's now impossible for banks to raise their spread for their agreed interest rates last year.
However, if you're about to sign up for a SIBOR-pegged loan, it's definitely worth keeping in mind that banks could potentially raise their spread at some point.
This also means that the longer you wait to apply for a SIBOR-pegged loan at this point, the higher your lowest possible home loan interest rate is going to be as banks gradually increase their spread.
Longer-period loans may also be less beneficial since you'll end up paying higher interest rates later on in your loan term once banks have increased their spread or SIBOR increases.
The government may intervene
Lower SIBOR rates could also potentially lead to a bit of a property buying frenzy in the market, and so it's still a possibility that the government may intervene with cooling measures to prevent interest rates from dropping further.
Cheaper SIBOR-pegged home loans
However, for the time being, those of you in the market for a home loan will be able to take advantage of some attractive, low-interest rates for SIBOR home loans.
After considering and weighing your options carefully, you may decide that this is an opportunity you'd like to take for cheaper interest rates on your home loan.
In that case, now may be the time for the home of your own you've been dreaming of!