From Variable Rate Loans to Fixed Rate Loans: Options for Clients Who Still Have SOR-Based Home Loans

When choosing between a new loan based on SORA and the SORA conversion package, clients should not only compare the interest rate, but also pay attention to the terms and conditions. For example, switching to an existing plan with the same bank may come with a lock-in period. The penalties for prepaying the loan may also differ, which will affect those who sell their home or who have the means to prepay a significant part of their mortgage.

Option 2. Fixed Rate Loans

Many banks offer loans with a fixed interest rate for the first two or three years. The rates for subsequent years will be based on the SORA or another variable rate.

Fixed rate mortgages typically carry a higher interest rate than variable rate mortgages because the rate is locked in for the first two or three years. As global interest rates are expected to rise, the difference between fixed and floating rates could be higher than in the past.

Customers with SOR-based loans will not incur any fees if they decide to switch to a fixed rate loan with the same bank as long as the loan term remains the same. However, a blocking period may apply.

After the initial two to three year period on fixed rates, customers who prefer the stability of fixed interest rates may be able to negotiate a new fixed rate package with their bank.

Option 3. Combination of fixed and variable rate loan

Some banks allow customers to opt for loans with a combination of fixed and variable rates to reduce interest rate volatility.

Assuming that 50% of the loan is fixed rate while the remaining 50% is indexed to SORA, a one percentage point increase in three-month compound SORA will result in a 50 basis point lower increase in the overall blended interest rates since half of the loan repayment is fixed.

The reverse, however, also applies, which means that customers of these hybrid loan formulas will not benefit as much if interest rates fall in the future.

Option 4. Bank Managed Advice Rate Loans

Bank-managed board rates (e.g. fixed rate indexed to deposits) are interest rates that banks determine internally as benchmarks for pricing various loans, including mortgages . As repo rates can go up and down over time, repo rate loans are also a type of variable rate loan.

Loans that reference board rates are less transparent as they are managed internally by the bank, compared to SORA-linked loans since SORA is calculated and published daily by MAS using overnight funding transactions real day between banks.

Talk to your bank today

Customers in Singapore have enjoyed low and stable interest rates over the past decade, which means they rarely see a big difference in monthly repayments each time variable rate home loans are reset.

The interest rate environment has changed, so clients with loans referencing SOR should take the opportunity to talk to their banks and explore their options.

Mr. Lawrence Loh, who leads the Consumer Products sub-group within the SC-STS, says: “Customers need to compare not only the all-inclusive rate, but also the terms. The best option for someone planning to sell their apartment in the near future may be different for someone who does not intend to change housing during the term of the loan.

About Brandon A. Hood

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