Prior to the recent revision down wards of the Singapore Inter-Bank Offer Rate (SIBOR), the interest rate market has been escalating consistently and rapidly; financial institutions (FIs) were adjusting their rates north wards to the point where it had raised concerns with borrowers. The main concern surfaced was the issue of transparency of rates.  For traditional board rates, all FIs would set their own rate arbitrarily and when occasions where the SIBOR had fallen, FIs have shown that they may not necessarily have to lower their board rate in tendum. When asked by borrowers as to how a FI arrives at their board rate, a common response would be that they take into consideration their respective cost of fund, operating cost, and also opportunity cost when determining their board rate. 

Initiated by MAS and ABS, FIs now have introduced packages that are pegged to the SIBOR, SOR (SWAP Offer Rate), or even CPF rate.  These transparent rates are published in the Business Times daily. The advantage of such reference rate is that when SIBOR moves down, your interest rate would be adjusted accordingly. Instead of the traditional practice of giving a discount off their respective board rate, FIs offering such reference / pegged rate packages would add a premium above the reference rate. Which ever direction the rate goes, you are assured that you are paying based on transparent market rates. It is also important to note that transparency does not necessarily mean the lowest rate available. What reference rates present is the peace of mind knowing that you are not paying excessive rates due to any FI’s drive to increase their bottom line.  For FIs that offer reference / pegged rates, various packages would be bundled with some offering a fixed discounted rate for the initial years after which the effective interest rate charged would be based on a premium above the respective reference rate. Some would offer a plain vanilla where the rate is pegged from day one. Reference rates today may take different forms depending on the rate that it is pegged to, namely SIBOR, SOR, or CPF. For SIBOR, it is currently offered on a 12 months SIBOR, meaning that the rate is pegged for 12 months and the next revision would be prior to the first anniversary and like wise there after. As for the SOR rate, it is currently offered on a 3 months, 6 months, or 9 months SOR rate. Where the rate would be reviewed every 3, 6 or 9 months respectively.

Board rates on the other hand are determined by the respective FI and no accountability is required of them to explain how they arrive at any particular rate. FIs’ board rates are guided by and not determined by SIBOR.  FIs are free to vary the board rate and discount that they would offer without having to give any prior notice.  As such, FIs may move their board rate either way regardless of where SIBOR is headed for.  For packages offered on the board rate, FIs would normally offer a fixed discounted rate for the initial years, after which the effective interest rate charged would be based purely on the board rate at that point of time. By then you would be back on a variable rate.

When taking up a housing loan, you have to decide if you prefer a rate that is transparent or one where the board rate is not so transparent. Variable interest rate packages working of the board rate are generally lower than the fixed rate, but these packages would be completely exposed to the variability of the interest rate market.  The lowest interest rate possible today is a package where the variable rate package comes with a specified lock-in period. Should you decide to exit from such a package within the lock-in period, you would be imposed with a prepayment penalty and a claw back for all subsidies that were given by the FI.