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 re-freshed. 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 for a short time more, from previous months.
Should I Pick a 1-Month or 3-Month SIBOR?
Ideally, a borrower with the perspective of just getting the lowest rate possible will benefit from getting the 1mth SIBOR at this time. This of course, is not always an available option as it is more common for banks to use 3 mth SIBORs.
There is no one answer to this question, and it is best to look at the package details as a whole when making you decision, as a 1 mth SIBOR package may not necessarily be the best suited one for you.