You’ve called around to different banks and gotten all their interest rates, and now you have one burning question: why?
Why do some banks even bother trying to sell home loan packages, with interest rates way higher than all the others? After all, everyone should theoretically just go to the cheapest bank.
It’s a good question, and understanding why this happens can help a home buyer. It will also explain how your home loan rates are set, and how you can minimise interest repayments:
How is the underlying interest rate on your home loan determined?
At present, many home loans are determined by a combination of the bank’s spread (a fee the bank is charging), plus the underlying interest rate.
At the time of writing, the underlying rate is usually the Singapore Interbank Offered Rate (SIBOR). This is the median rate at which banks are lending to one another. So the interest rate may be expressed as:
3M SIBOR + 0.12
Which means it’s the prevailing 3 Month SIBOR rate, plus a spread of 0.12. You can check the current SIBOR rate on The Association of Banks in Singapore (ABS) site.
Alternatively, the underlying rate can be a board rate, which means you allow the bank to control the rate. A common version of this is fixed-deposit pegged rates, where your home loan rate is pegged to the fixed deposit rates of the bank.
However, note that SIBOR may be replaced with SORA
The Singapore Overnight Rate Average (SORA) was originally meant to replace a rate called SOR* by end-2021; however, there’s a chance it may also replace SIBOR.
| SOR | SORA | |
| Definition | Effective rate of borrowing SGD synthetically, by borrowing USD and swapping for SGD | Average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore |
| Methodology and inputs | Volume-weighted average rate of USD/SGD FX swap transactions, with USD LIBOR as an input | Volume-weighted average rate of transactions reported by Reporting Banks in Singapore to MAS |
| Administrator | ABS Benchmarks Administration Co | MAS |
| Tenor | Overnight, 1-month, 3-month, 6-month | Overnight |
The key difference is that SORA is based on previous transactions, whereas SIBOR is based on projected interest rates. Without going into too much detail, SORA is in theory less volatile than SIBOR. This means the interest rate will move in smaller amounts (e.g. whereas SIBOR might swing up or down 0.3 per cent, SORA might move in the same direction by just 0.2 per cent).
The interest rate will still fluctuate though.
*SOR is the underlying rate for commercial properties, and for some residential properties that still use it (it’s no longer available for home loans, so we won’t go into it here).
Besides the underlying rate, there are other factors that may raise or lower the bank’s spread:
- Mortgage demand and the general state of the real estate market
- Quotas that the bank wants to meet
- The mortgage banker lowering their commission
- Promotions
1. Mortgage demand and the general state of the real estate market
This is a supply and demand issue. If the bank sees that the demand for home loans is high, or predicts that we’re going into a real estate boom, they may raise their spread.
Likewise, if the bank sees a downturn in real estate, they may keep their spread low to attract the dwindling number of buyers.
2. Quotas that the bank wants to meet
The bank has specific targets on how much it wants to give out in loans (much like other businesses have sales quotas).
For most banks, the spread tends to rise as when it nears or hits its quotas. This is also why some banks can be cheaper this month, but are among the most expensive next month.
3. The mortgage banker lowering their commission
It’s possible for some borrowers to get home loan rates that aren’t even advertised.
This is because the mortgage banker has a bit of leeway in how they sell the loans – in some cases, a mortgage banker might be willing to surrender some of their own commissions, to give a borrower a lower rate.
It sometimes happens as a result of a mortgage broker (not the same as a banker), who manages to convince the banker to give you a better deal. Give us a shout out if you need this kind of service.
4. Promotions
This is similar to a sale in a store. A bank may lower its spread to capture a wider market share, to meet branding and marketing goals, etc.
These tend to accompany home loans with new or unusual features, that the bank wants to introduce to the market.
As banks have different spreads and underlying rates, only two or three banks tend to stand out as the cheapest, at any given point
Out of all the banks offering loans, two or three will usually be the cheapest (e.g. they have the lowest spreads and have a board rate that’s way lower than the current SIBOR rate, etc.)
However, this changes fast. The cheapest banks in August, for instance, may no longer be the cheapest by November. Unfortunately, you need to check bank rates all over again, whenever you take a new loan or refinance.
Why do the banks with the highest home loan rates even bother offering them? Who takes these loans?
To answer the two questions, yes, there are people who take loans that cost more. And they may do so because:
- It’s an emergency
- Bonus savings tiers or other promotional tie-ins
- There’s no other choice open to them
- The bank gave them a better valuation
- Special features in the loan
1. It’s an emergency
One such situation is when a buyer secures the Option To Purchase (OTP), and then finds out they can’t get financing from their desired bank.
This would leave them 14 to 21 days to find a home loan, and they may end up with a more expensive bank out of desperation.
(You can avoid this by getting pre-approval from banks, before securing the OTP.)
2. Bonus savings tiers or other promotional tie-ins
Some banking products have “bonus tiers”, like DBS Multiplier Accounts. If you take your home loan from the bank, you may get a higher interest rate on your savings.
You should calculate how much you’ll earn from the bonus interest, and then compare it against the savings from a cheaper loan package.
3. There’s no other choice open to them
For whatever reason (credit history, past disputes with the bank, a property located close to vice areas like Orchard Towers, etc.), the borrower is unable to get a home loan from cheaper banks.
This may force them into getting a home loan from whichever bank will accept them. If they’re unlucky, that bank may be one of the more expensive ones.
4. The bank gave them a better valuation
The maximum loan amount is 75 per cent of your property price or value, whichever is lower. So if the seller is asking for $1,100,000, but the valuation is $1,050,000, then the extra $50,000 will have to be covered in cash.
Sometimes, a borrower will tolerate a higher interest rate, because the bank accepts a higher valuation on the property.
(Note: this is a non-issue with properties bought directly from a developer; the valuation and price are considered to be the same for new properties).
5. Special features in the loan
These are features like no early repayment penalty (up to a certain amount), free repricing to different loan packages later, unusually long fixed-rate periods, and so forth.
Whether these features justify a higher interest rate is hard to say. For example, being able to reprice (once) for free might save you money; if the bank comes up with a cheaper loan package later. But if the bank doesn’t come up with a cheaper package, then it was just a pointless option.
Banks come up with new home loan innovations all the time, and it’s hard to determine how useful they actually are. Overall, this is a conversation to have with a qualified loans specialist, such as a mortgage broker.
Now that you know how it works, do approach your home loan with greater diligence
At Stacked, we like to look beyond the headlines and surface-level numbers, and focus on how things play out in the real world.
If you’d like to discuss how this applies to your own circumstances, you can reach out for a one-to-one consultation here.
And if you simply have a question or want to share a thought, feel free to write to us at stories@stackedhomes.com — we read every message.
Frequently asked questions
Why do some banks offer home loans with higher interest rates than others?
How is the interest rate on a home loan determined?
Why would a bank with a high home loan interest rate still sell those loans?
Can the interest rate on my home loan change over time?
Why do banks with the highest home loan rates still try to sell their loans?
How often do the cheapest home loan options change?
