Choosing between a fixed or floating interest rate isn’t the only choice you must make. You must also consider whether to select 1-Month or 3-Month SIBOR rate for your home loan. Picking the right one can directly impact your financial planning and the long-term cost of your loan.
What Does X-Month SIBOR Mean?
The length of a SIBOR, whether it’s 1, 3, 6, 9, or 12 months determines how often the rate is renewed. A 1-month SIBOR means that your prevailing SIBOR rate is renewed monthly. The majority of bank home loans follow a 1- or 3-month SIBOR, while HDB home loans only offer a 3-month SIBOR.
Why Are Monthly SIBOR Adjustments Used?
Banks use this arrangement to prevent speculative timing on the daily fluctuation of SIBOR rates. Otherwise, they would be overwhelmed by borrowers rushing to get their loans processed on specific days when the rate is “timed” to be lowest.
It’s for this reason that banks only use monthly SIBOR adjustments taken on the first of month. So if the rate was 0.32% on 1 March, everyone getting a loan during the month would receive the same rate.
Depending on the bank, the SIBOR rate used will either be from the month your letter of offer was signed or the month the loan is disbursed, which is usually 3 months after signing.
What’s the Difference Between a 1-Month and 3-Month SIBOR Rate?
The choice depends on the direction of interest rates. When SIBOR rates begin to fall, a 1-month SIBOR is cheaper than a 3-month SIBOR. But if interest rates rise, then the opposite is true because a 3-month SIBOR would maintain the lower rate from previous months.
Should I Pick a 1-Month or 3-Month SIBOR?
With rates bottoming out to a 10-year low, it’s looking like SIBOR rates will remain steady till at least 2015. This means that a 3-month SIBOR is currently a more stable choice, especially if the interest rate starts to climb. But if it appears like SIBOR rates might drop lower, you can consider a 1-month SIBOR.