Much has been mentioned about the “transparency” of Sibor-pegged mortgage loans. But there are TWO risks associated with such loans.
First is of course the possibility that the Sibor rate may go up. And it may shoot up dramatically.
Just 3 years ago, Sibor was hovering around 3.5%. If your bank charges you Sibor + 1.5%, you would be paying 5%. More dramatically, in 1998, Sibor spiked to 9.5%! See also Sibor History.
The second risk is about the “transparency” or lack of it.
Notice that banks always say “Sibor + x.xx%” in their advertisements? The “x.xx%” is the interest margin or spread. Banks currently charge
an interest margin of 1% to 1.5%.
However, the banks DO NOT guarantee that the interest margin will stay fixed. In other words, your bank may increase its spread to squeeze more from you, even if Sibor stays low. [See article in asiaone with comment that “(banks) may increase their (interest) margins to make sure revenue doesn’t drop that much.”]
They have done it before and they will do it again in all likelihood. Banks like DBS and HSBC have increased their advertised spreads previously (see asiaone article).
By inference, it’s highly likely that they are using different spreads for home loan packages taken up at different times. By further inference, they may also increase the spreads anytime simply by giving you notice.
This is not much different from taking up a board rate loan. The “board rate” (BR), or “prime rate”, or whatever they call it, is a mysterious creature. And it’s a scary creature.
I have first hand experience in this about 6 years ago. The bank that I used upped the effective loan rate to more than 7%. All it needed to do was to inform me about the change. No reason was given. Of course. What do you expect.
More evidence of the scary creature: in it’s website, UOB says “the BR offered for your loan package may be different from BRs offered to other customers for different loan packages” and that “the BR can be changed by the bank anytime, by giving 30 days’ notice, depending on market conditions and/or changes in the financial indicator(s) against which the BR is benchmarked. This 30-day notice requirement does not apply to home loans benchmarked against market indices.”
The last sentence sounds scary. Does it mean that they can adjust the Sibor spread every day or even every hour if they want to?
Perhaps your only defence is to take up a loan with no lock-in period and refinance immediately when you notice your bank is pulling a fast one on you.