Understanding mortgage loans

[THEMIKOS]

Have been googling and don’t quite understand how housing loans work. Can anyone explain in layman terms the following?

1. Sibor - interbank lending of money. Why do banks need to borrow money? So should we borrow from only the biggest banks? Rates are also set by internal policies. Are borrowers at the mercy if the rates are changed every now and then?

2. Fixed rate mortgage - where do i check for the rates? What i found on the net are only 2,3,5 year fixed rates after that it will be floating Sibor. Are there not any fixed rates for the whole duration of the loan?

3. If the rates always change, how do i forecast how much interest i will have paid for my property in future.

4. Refinancing every 2-3 years - how does this work in favour of the borrower? Because i note that whenever a loan is issued, majority of the repayment goes to the interest according to amortization. So at the end of 2/3 years when a refinance is done, is the loan repayment not going towards repaying the interest?

I don’t quite understand and so hope some kind soul will explain. Thanks in advance.

 

[lousylah]

TLDR Summary : 1) You cannot beat the bank in the forecast game. 2) If you cannot make heads or tails of the financing mechanisms, just stick to HDB loan or Fixed Rate package from banks

Interbank Market
Banks make money by borrowing money (deposits from you+me, corporates, etc) and making loans with it (mortgage, car loans, SME loans, credit cards, etc)

Deposits are generally short-term in nature (on-demand to 12mth mostly), loans are generally longer term - same examples of mortgage, car loans, even personal loans have minimum tenure.

Day-to-day banks may either be in excess or in shortage of funds (i.e. deposits>loans or vice versa). The treasury department of the bank will then go to market to either place out the excess or borrow the shortfall. This is the interbank market.

SIBOR
SIBOR is an average of the rates banks charge each other for borrowing funds at various tenures (1mth, 3mth, 6mth, etc). In normal economic environment, these rates tend to be rather stable day-to-day shifting when market conditions change. Some economists, banks are even able to forecast the rates.

It is with this forecast/view that influence how banks price their medium-to-long-term products (mortgage in this case). If banks forecast rates to move up in the coming year, they may be willing to offer a small spread (like 10-20bps) over SIBOR for floating packages while pricing in the hike in the fixed rate package (maybe current SIBOR + 50-75bps).

So you will have to take a view when picking a package. In reality, unless you have ready access to updated economist reports, economic data, etc (from your work perhaps), you will not be able to beat the bank on its forecast.

Again because rates are not static and forecast gets updated regularly, no bank will offer a fix rate for entire duration of a 20Y/30Y mortgage. Even HDB loan is not fixed, 2.6% is the floor (minimum effective rate).

Conclusion
Buying a property and servicing a mortgage is a long-term commitment (20-30 years), there will be alot of changes in that period. Why are you fixated on the total interest amount you will pay? If affordability is an issue then live within your means (small hdb in non-prime area or even just live with parents?)

 

[iduncheckmail]

Have been googling and don’t quite understand how housing loans work. Can anyone explain in layman terms the following?

1. Sibor - interbank lending of money. Why do banks need to borrow money? So should we borrow from only the biggest banks? Rates are also set by internal policies. Are borrowers at the mercy if the rates are changed every now and then?

2. Fixed rate mortgage - where do i check for the rates? What i found on the net are only 2,3,5 year fixed rates after that it will be floating Sibor. Are there not any fixed rates for the whole duration of the loan?

3. If the rates always change, how do i forecast how much interest i will have paid for my property in future.

4. Refinancing every 2-3 years - how does this work in favour of the borrower? Because i note that whenever a loan is issued, majority of the repayment goes to the interest according to amortization. So at the end of 2/3 years when a refinance is done, is the loan repayment not going towards repaying the interest?

I don’t quite understand and so hope some kind soul will explain. Thanks in advance.

TLDR.
Mortgage these days is like HP contracts . Sign 2-3 years then refinance (recontract) .
And for private , no one expects to pay the property in full. Most likely sell before then.
For HDB, don’t tink so much just sign the cheapest at that time. The variance on HDB loans is a pittance .

 

[THEMIKOS]

Thanks for replying lousylah and Idontcheckmail. My concern is not about affordability to repay. I wanted to calculate if i should:

1) repay my existing Hdb loan in full and take a higher loan to buy a private for investment
2) continue with the instalments (didnt refinance to fixed tenure and my monthly Bank repayments have been going up but still lesser then what OA pays me for interest) or should i refinance to save on interests paid overall + pay the 40%+ABSD and get a lower loan for my investment.

Am asking for the information to draw up multiple spreadsheets to see which taxes me the lowest interest to be paid.

 

[ikilledbarbie]

TLDR Summary : 1) You cannot beat the bank in the forecast game. 2) If you cannot make heads or tails of the financing mechanisms, just stick to HDB loan or Fixed Rate package from banks

Interbank Market
Banks make money by borrowing money (deposits from you+me, corporates, etc) and making loans with it (mortgage, car loans, SME loans, credit cards, etc)

Deposits are generally short-term in nature (on-demand to 12mth mostly), loans are generally longer term - same examples of mortgage, car loans, even personal loans have minimum tenure.

Day-to-day banks may either be in excess or in shortage of funds (i.e. deposits>loans or vice versa). The treasury department of the bank will then go to market to either place out the excess or borrow the shortfall. This is the interbank market.

SIBOR
SIBOR is an average of the rates banks charge each other for borrowing funds at various tenures (1mth, 3mth, 6mth, etc). In normal economic environment, these rates tend to be rather stable day-to-day shifting when market conditions change. Some economists, banks are even able to forecast the rates.

It is with this forecast/view that influence how banks price their medium-to-long-term products (mortgage in this case). If banks forecast rates to move up in the coming year, they may be willing to offer a small spread (like 10-20bps) over SIBOR for floating packages while pricing in the hike in the fixed rate package (maybe current SIBOR + 50-75bps).

So you will have to take a view when picking a package. In reality, unless you have ready access to updated economist reports, economic data, etc (from your work perhaps), you will not be able to beat the bank on its forecast.

Again because rates are not static and forecast gets updated regularly, no bank will offer a fix rate for entire duration of a 20Y/30Y mortgage. Even HDB loan is not fixed, 2.6% is the floor (minimum effective rate).

Conclusion
Buying a property and servicing a mortgage is a long-term commitment (20-30 years), there will be alot of changes in that period. Why are you fixated on the total interest amount you will pay? If affordability is an issue then live within your means (small hdb in non-prime area or even just live with parents?)

That's simple and concise.

Could you explain SOFR in your words?