Deciphering rates

Deciphering rates

Reference or board rate: These vary from bank to bank, and even within a single bank, they can vary from one loan package to another.

Board rates are the basic rates used for loan packages. A bank can create its own board rates for loans, taking into account factors such as its funding costs at the time when the loan was taken, the type of property and the Singapore Interbank Offer Rate (Sibor).

Under the new guidelines by the Association of Banks in Singapore (ABS), banks must tell you what external benchmark rates they use to determine their board rates. They must inform you in advance (usually 30 days) before they change their board rates.

Blended rates: In this case, some years of the housing loan package are tagged to a fixed rate while the remainder are tagged to a variable one. The effective rate is worked out by blending the two portions. The effective rate will still change over time as the variable rate fluctuates with market conditions.

Still, the variable-rate portion of promotional blended-rate packages can be much lower than is the case for normal variable-rate ones, though rates will move up and down with market changes, noted Mr Wu Yihong of consultancy MyHappyHouse.com.sg

If you set aside promotional rates, blended rates are generally at roughly the same level as those for plain-vanilla floating-rate or fixed-rate packages.

Pegged board rates: These are directly linked to published rates, such as Sibor (published in newspapers) or the Central Provident Fund rate, which is now at 2.5 per cent.

Pegged board rates are usually about 1 percentage point higher than these rates.

A key plus is that consumers can track these publicly available rates to see how their own rates are calculated.

Effective annual rate (EAR): This reflects the annual cost of the interest that you have to fork out throughout the loan. The lower the EAR, the lower the interest cost over the loan tenure.

The EAR could be higher than the rate advertised by the banks over, say, the first three years.

Some features

Claw-back period: This is the length of time, usually three years, that the borrower has to refund the subsidy on legal costs that is provided by the bank. This subsidy usually comes to 0.4 per cent of the loan amount. The borrower might also have to pay back extra perks, such as fire insurance, thrown in by the bank, if the loan is fully paid off during the claw-back period.

Refinancing during or after lock-in periods: If you are out of the lock-in period, typically, the only cost of refinancing tends to be the legal cost.

If you are still within the lock-in period, you will have to fork out a repayment penalty and refund the legal subsidy.

Customers should check to see if the savings they can get from lower interest rates at another bank would more than offset these costs of refinancing.

Interest-servicing package: The borrower services only monthly interest repayments, leaving the principal loan sum undiminished. The interest rate applicable to this type of housing loan could be slightly higher than for a typical principal-and-interest housing loan. Such packages appeal to investors who are trying to lower their monthly mortgage repayments.

For more information, you can refer to a consumer guide issued ABS titled Key Questions To Ask The Bank Before Taking A Home Loan.

Source: The Sunday Times, 24 June 2007