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    Banks Increase Interest Rates on Home Loans as SIBOR Rises

    Banks have hiked interest rates on home loans following an improvement in the interbank lending rate (SIBOR) and a rise in the risk of loan defaults amid a weak rental market.

    BankBazaar Singapore – January 15, 2018

    SINGAPORE: Costs of home loans are on the rise after the recent increase in the country’s interbank lending rate, raising concerns over forecasts of property market recovering this year.

    Interest rates on floating and fixed residential property loans are up by about 10 to 30 basis points. Rates on OCBC Bank’s two-year fixed home loan product have been increased to 1.85% from 1.75% per year.

    For a similar product, DBS now charges 1.95% interest rate per year. Interest rates on UOB’s three-year fixed package are now 2.05%. According to some reports, both these banks were charging an annual interest rate of 1.85% until recently.

    The Singapore Interbank Offered Rate (SIBOR) had increased towards the close of December 2017 and had touched 1.5% early this month before easing to 1.3% days later. The rate had remained subdued for the most of second half of 2017. SIBOR plays an important role in determining home loan interest rates.

    Increasing risks of loan defaults due to a weak rental market could also be a reason for the rising cost of home loans. Estimates from the real-estate services firm SRX Property suggest that private home rental volumes were down 15.3% in December 2017 over the same month in the previous year. Rents were down more than 20% from their peak levels recorded five years ago.

    The higher borrowing costs are expected to worry analysts who have largely remained optimistic about a recovery in the country’s lately-lacklustre property market. Reports have forecast home prices could rise about 8% this year and the next. However, the rise in home loan prices could hurt demand.

    Some analysts have even warned that the anticipation of improvements in the property market could lead to overheating. According to RHB Research, over-enthusiasm is causing about 10% to 40% of the increase in property prices. There are even concerns that the low rents could hurt investor interest.

    Despite this, some banks are of the opinion that the negative impact of rising interest rates may not be too significant. Speaking to The Straits Times, Vasu Menon, VP of OCBC, said that potential macroeconomic developments like GDP growth and rise in wages could offset the impact of rising home loan costs.

    The national GDP grew at the fastest rate in three years in 2017. Last year, the government had said that job market could improve in 2018, although wages may not see a rapid increase.

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