What is SIBOR?
SIBOR is the reference rate used by banks in Singapore when lending unsecured funds to each other. It effectively reflects how much it would cost banks to borrow from each other.
SIBOR is calculated on a daily basis based on the average cost of borrowing funds in the interbank market. It is usually calculated for one, three, six and 12-month maturities (period of time).
The actual calculation is based on the daily rates submitted to the Association of Banks in Singapore (ABS) by at least 12 and up to 20 contributing banks. The compiled rates are then ranked, with those on the upper and lower quartiles eliminated from the list. The remaining rates are then averaged to make the day’s SIBOR.
Why does it matter? Simply put, it matters to home owners and prospective home buyers as the majority of Singapore’s home loan packages are based on SIBOR.
Why Does SIBOR Matter When You Decide to Buy a House?
When you get a house loan or mortgage, the interest rate you will have to pay on a SIBOR-based mortgage will comprise of the SIBOR reference rate plus an additional premium charged by financial institutions.
For example, the interest rate on a SIBOR-pegged mortgage would be the aggregate of a three month (3M) SIBOR rate + 0.9%. Based on the current 3-month SIBOR rate of 1.0%, the total interest rate on the home loan would be 1.9%. It is important to note that Banks typically differentiate themselves by offering varying spreads and incentives.
Even though the SIBOR rate changes daily, banks typically use a fixed SIBOR rate that is determined on the first business day of each month.
As highlighted previously, there are 1M, 3M, 6M and 12M (M being months) SIBOR tenors. What this means is – in a 1M SIBOR mortgage, the SIBOR interest rate would be reset each month. How should one decide on the tenor of the SIBOR reference rate? Buyers who opt for shorter tenure SIBOR packages will be able to take advantage of falling SIBOR rates. In contrast, longer tenure SIBOR packages will benefit from locking in lower SIBOR rates in a rising interest rate environment.
So, where will SIBOR Rates be in the near term?
For those of you looking to refinance or to enter a new mortgage, we have started to see a slowdown in the rise of interest rates amid slower economic growth. The US Central Bank signalled that it would raise rates more gradually given concerns around employment and the US economic outlook, on the back of Brexit. Based on DREA, the three-month SIBOR rate has fallen from its peak of 1.25% to 1.0% with interest hike expectations dampening. For homeowners with SIBOR-pegged mortgages, we see this as an opportunity for you to take advantage of the lower interest rates.