POSB is offering HDB flat buyers housing loan interest rate that is pegged to CPF Ordinary Account Rate. It is currently the only bank offering home loan package with interest rate cap for as long as 10 years.
How does it work?
Under the POSB package, borrowers will pay housing loan interest rate at 1.38% above the 3 month SIBOR for the first 10 years and thereafter at 1.48% above 3 month SIBOR. For the first 10 years, POSB has set a cap on the interest rate at CPF Ordinary Account Rate of 2.5%, which means borrowers will not be paying more than 2.5% in interest even if SIBOR goes up.
The current 3 month SIBOR is 0.37%. After adding on the mark up of 1.38%, the housing loan rate works out to be 1.75%. If the 3 month SIBOR were to increase, such that the overall housing loan rate rises to 2.5% and beyond, borrowers are only required to pay 2.5% in interest and nothing more.
What are the benefits?
Borrowers get to enjoy the best of both worlds, ie. enjoy the lower housing loan rate at 1.75% when SIBOR is low and at the same time, assured of housing loan rate not exceeding 2.5% when SIBOR goes up. Such package is suitable for borrowers who are risk averse but would still want to have the opportunities to save in interest costs.
The 3 month SIBOR has to move up from the current 0.37% to 1.12% before the overall interest rate reaches the cap of 2.5%. in this way, borrowers benefit from interest savings of 0.75% on the housing loan.
How does POSB package compare with HDB Concessionary Loan Rate?
The HDB Concessionary Loan rate is currently at 2.6% (ie. 0.1% above CPF Ordinary Account rate), which has been relatively stable for the past 10 years.
However, due to the current low interest rate environment, the HDB Concessionary Rate may appear unattractive to some borrowers.
For a loan of $500K over a 30 year loan tenor, under a HDB Concessionary Loan, the interest cost is $12,916 for the first year versus lower interest cost of $8,677 under a POSB package. The difference in interest cost is $4,239 for first year alone. If we calculate based on first 3 years, the interest differential will be substantial at $12,516.
|Year 1 to 3||$37,872||$25,356||$(12,516)|
How does POSB package compare with fixed rate package offered by other banks?
There is currently competitive fixed rate package for first 3 years that is offering at average 1.32% per annum. This would look even more attractive compared to POSB's 1.75% interest rate.
For the same loan of $500K over 30 year period, the interest cost for the first year works out to be $6,538 based on the fixed 3 years package at 1.32%. When compare with POSB package, the interest differential works out to be $2,139. When comparing the total interest payable for first 3 years, the difference in interest costs will be greater at $6,285.
|Fixed 3 Year Package||POSB Package||Difference|
|Year 1 to 3||$19,071||$25,356||$(6,285)|
The 'catch' for the fixed rate package is that the interest rate is fixed at 1.32% per annum (average) for the first 3 years only. Borrowers will be subject to market rate from fourth year onwards. Furthermore, the package comes with a repayment penalty which may not be suitable for home buyers who intend to reduce the principal within the next few years.
The 3 packages mentioned above share both pros and cons in their features as each package is designed to serve the different needs of the HDB home buyers. It is important that borrowers are informed of the choices available and choose the package that is most appropriate to their circumstances.
Reference Historical CPF Rate