Sibor dives

Feb 19, 2009 (Straits Times)

Most banks have raised their spreads to make up for increased risk and higher capital costs

A KEY interest rate that sets the cost of interbank lending has plunged in recent weeks, but those taking out new mortgages will be no better off.

The three-month Singapore Interbank Offered Rate, or Sibor, dived to 0.68 per cent this month, bringing it near the all-time low of 0.63 per cent reached in June 2003.

The rate at which banks lend to one another has been dropping since September last year, and is expected to stay low.

But new home buyers expecting interest rates for Sibor-linked housing loans to fall in tandem will be disappointed.

To compensate for increased risk and the higher cost of capital, most banks have upped the spreads that they charge above Sibor, making Sibor-pegged home loans more expensive.

At DBS Bank, a home buyer taking a loan of 80 per cent of his property's value in July last year would have paid a rate of Sibor plus 1.25 percentage points. Now, a new buyer has to pay Sibor plus 1.75 percentage points.

Even though Sibor fell from 1 per cent to 0.68 per cent between last July and now, the rate charged has actually risen from 2.25 per cent to 2.43 per cent.

The margin on HSBC's standard Sibor-pegged package now stands at 1.25 points, up from 0.7 point last July. The rate has effectively risen to 1.93 per cent, from 1.7 per cent.