You will be able to explain how fixed, floating and SORA-pegged packages set the rate you pay.
The mortgage broker sent Farah and Hakim three bank packages in one message. One said "2.50% fixed, 2 years". One said "3M SORA + 0.30%". One said "2.35% fixed, 3 years, thereafter 3M SORA + 1.20%". Hakim's first instinct was to pick the lowest number. Farah pointed out that the lowest number lasted three years on a loan of twenty-five.
Every package sets your rate in one of a few ways, and the headline figure only tells you about the first of them. This lesson shows how each kind works and how to see what it would cost if rates moved.
A fixed package holds the interest rate for a set number of years, often two to five. During that time your instalment doesn't change, whatever happens to market rates. That certainty is what you pay for, and fixed rates tend to sit above floating ones when markets expect rates to rise, and can sit below them when markets expect rates to fall.
The fixed period ends long before the loan does. After it, the package switches to a floating rate, written in the offer as "thereafter". That later rate is what you'll pay if you do nothing, so it belongs in any comparison. Read the fine print: payslips, statements, policies and contracts, lesson 8.1, How the rate is set: fixed, floating and what it is pegged to, shows how to find it in an offer letter.
Most floating packages are pegged to SORA, the Singapore Overnight Rate Average, published by MAS. Your rate is the benchmark plus a spread, the fixed margin the bank adds on top and keeps for the life of the package, or changes on a schedule written into the offer.
The benchmark is usually a compounded SORA over one or three months, such as 3M SORA. It looks backwards, averaging the overnight rate over the past period, so your rate is reset each period to reflect what rates just did. If SORA rises, your rate rises at the next reset, and so does your instalment.
Why SORA moves is a different subject. How the economy hits your wallet: rates, inflation and cycles, lesson 2.2, What SORA is and how it ends up in your mortgage, explains it. Here what matters is the arithmetic.
Take an example 3M SORA of 2.40%, invented for this lesson. The broker's second package, SORA plus 0.30%, would charge 2.70%. On Farah and Hakim's S$427,000 loan over 25 years, that is S$1,958.89 a month. If SORA rose by one percentage point, to 3.40%, the rate would be 3.70% and the instalment S$2,183.74. That is about S$225 more every month, from a move in a rate they don't control.
Some packages are tied to a board rate, a rate the bank sets itself. The bank can change it when it chooses, and the offer letter usually doesn't say what would trigger a change. A board rate package might look cheap today, but you can't check how it is set, and you can't predict it from published figures.
A SORA peg is easier to watch, because SORA is published and the spread is in your contract. With a board rate, you are relying on the bank's choices. Some buyers accept that for a lower starting rate. Know which kind you have.
Back to the broker's message. Here is what each package would cost Farah and Hakim now, and if the benchmark rose by one point, using the invented SORA of 2.40%.
The first package is fixed at 2.50% for two years. Today and with a one-point rise, they would pay 2.50% and S$1,915.59 a month for those two years. After that, it floats, at a rate their broker said was SORA plus 1.00%, which would be 3.40% today or 4.40% after the rise.
The second is SORA plus 0.30%, floating from day one: 2.70% today, and 3.70% after a one-point rise, so S$1,958.89 a month rising to S$2,183.74.
The third is fixed at 2.35% for three years, S$1,883.50 a month, unaffected by any rise during that time. Thereafter it is SORA plus 1.20%, which would be 3.60% today and 4.60% after the rise.
The pattern is common. The packages with the lowest early rates often have the highest rates after the fixed period ends. Banks expect many borrowers to reprice or refinance when the lock-in ends, and price for those who don't. Lesson 8.1, Reprice or refinance when the lock-in ends, is about being one of the borrowers who acts.
For any package, you need three numbers: the rate now, the rate if the benchmark rose by one point, and the rate after any fixed period. With those, you can see what you are betting on. A fixed package bets that certainty is worth a little extra. A floating package bets that rates won't rise much while you hold it.
Farah and Hakim's broker had sent three packages, but the activity below asks for just two of yours: one fixed and one floating, each with its rate today and its rate after a one-point rise in the benchmark.
For one fixed and one floating package, write the rate now and what it would be if the benchmark rose by one percentage point.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).