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Fixed rates, SIBOR, FHR18 or HDB housing loans?

Saturday, August 6, 2016

Over the last year or so, I received quite a handful of emails and messages from readers on the subject of home loans. I think this blog post is probably overdue.

The banks can come up with fancy acronyms or names for their offers but there are basically two types of home loans: fixed rate or floating rate.

This is my take:

Fixed rates are for people who want to have a higher level of certainty and are quite happy with the lock in period. 

Floating rates are for people who wish to have the flexibility that comes from not having any lock in period.

I believe that which option we choose should depend on our circumstances, our beliefs and, hence, our strategy.

I choose a floating rate home loan pegged to the 1 month SIBOR (+ 1%) because I believe that I have the resources to pay down my home loan rapidly if interest rates should spike. 

For example, when interest rate on my home loan spiked to 5.1% many years ago, I chose to pay down the loan for my previous home. 

5.1%? Yes, I know this might look unbelievable to younger readers but ask the older folks and they should remember and, for some, it might have even been higher.

However, if I did not have the resources to pay down my home loan, I would have been stuck with the relatively high financing cost. 

I was not eligible to re-finance my home loan as the quantum was lesser than $200K by then. Banks weren't interested in refinancing relatively small loans.

This was a chat I had recently with a reader:

  • Reader: Hi Ak, are you able to update on your home loan vs bank loan blog. Do you think is advisable to get dbs bank loan. 1st year fhr18 + 0.4%, 2nd year onwards, fhr18 + 1.2%. Lock in for 2 years. Cpf is still 2.6%.

  • Assi AK
    Sounds like a good deal. The worry is the FHR18 and how high it could go but interest rates are likely to stay low for a while.

  • 11:21am

    I read your blog about paying home loan within 10 year. Lower interest. Is there a ideal year that we should finish our loan

    Number of year. Or a formula we can used
  • Assi AK
    10 years was because the fixed rate would end by then.

    It was an offer by POSB.

  • 11:23am

    That offer ended. So this is the current promotion. I hope it wouldn't go up more than 2.6 percent
  • Assi AK
    The first 2 years, you are probably safe but the FHR is floating. So, in the 2nd year, if it does not go to 1.4% or higher, you are safe. Further along the road, it would be harder to say.
  • 11:26am

    So in the other words. Hdb will be a better opinion
  • Assi AK
    Nope. I didn't say that. ;p It depends on our strategy, our circumstances and our beliefs. If we have the resources or are actively preparing the resources to be able to pay down our home loan rapidly in the event interest rates spike up, then, bank loans with the lower interest rates now are viable options to consider. Why not? Remember that once we opt for bank loans, we cannot go back to a HDB home loan.

The offer made to the reader by DBS here is pretty interesting because it is a floating rate with a lock in period of 2 years. Floating rates don't usually have a lock in period. 

What's the catch?

If the FHR18 should spike in these 2 years, bad luck, although it seems unlikely that it would.

What is FHR18?

The FHR18 is basically the interest rate on an 18 months fixed deposit offered by DBS. This is currently at 0.6% per annum. 

So, in the above example, first year interest rate is effectively 1% and for the second year and beyond, effective interest rate is 1.8% as long as the FHR18 stays unchanged.

There are debates on whether using the SIBOR (1 month or 3 months) plus a spread is better or whether FHR18 plus a spread is better. Central to the debates is the matter of transparency with the FHR18 being the winner. 

However, to me, what is more important in the decision making process apart from getting a good deal is to consider our circumstances and what we are able to do in the event that interest rates should spike. 

I always say that we cannot predict but we can prepare. If we are prepared, all is good. Peace of mind is priceless.


SMK said...

good one. i have stolen from this post.

AK71 said...

I have been reading your blog for a few months. Thank you for sharing your knowledge and wisdom. I just read your reply on whether to reduce home loand with CPF money and it will be useful for me in future. Thank you. Now, we have another question on which housing loan to take for flat. Do you have a blog on this? Thank you x100 :))

Welcome to my blog and congratulations on your new flat.
Yes, I have blogged about housing loans before and I hope this helps.

(Reader was referring to this blog:
Reduce home loan with CPF-OA or do OA to SA transfer?)

AK71 said...

Felix Chia Qi Wei says...
Where can I read about interest rates going up to 5.1%? Cannot refinance or what?

AK says...
I could not refinance back then because the remaining loan quantum was too small.

I blogged about it here too:

AK71 said...

AK71 said...

Sim On says...
So what is the best option if re-pricing is not possible due to small remaining sum i.e. less than 200k

AK says...
If we are not over-leveraged, we should have the resources to pay off the loan in full if interest rate shoots up and that was what I did.

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