With interest rates in Singapore close to their all-time lows, it may feel like a good time to go out and borrow money. Certainly the buoyant housing market can be at least partially attributed to low mortgage rates which increase the affordability of a property purchase. In this article we’ll take a look at where interest rates are in Singapore relative to their history, what typical interest rates for different types of loans are currently, and consider whether it’s a good idea to go out and take a loan now.

The Singapore Interbank Offered Rate (or SIBOR) is based on the interest rates at which banks offer to lend unsecured funds to other banks in the Singapore interbank market. As many mortgage loans are now pegged to it, it has become a key rate to look at and also gives a rough indication of where deposit and other lending rates are headed. For foreign banks that do not have a large deposit franchise in Singapore, they have to rely on the interbank market to fund their lending. When SIBOR is high, they might offer attractive fixed deposit rates to attract Singapore dollar deposits, forcing the local banks to also increase their rates to prevent depositors from switching.

Currently 3-month SIBOR is at 0.4375%, the lowest level in the past ten years. Interest rates have been low for an extended period of time – the 3-month SIBOR has been under 1% since the beginning of 2009. In the past ten years, the 3-month SIBOR has gone as high as 3.5% (in 2006).

Typical interest rates for different loan products

Doing a quick survey of the various loan products out there, we found that the current low interest rates have mainly benefitted mortgage borrowers due to low home loan rates, but rates for unsecured personal loans have not come off as much. For example:

1. Home Loans

These are the cheapest and largest loans that consumers can get, but you will need to use a property as collateral. Floating rate packages based on SIBOR can go as low as 0.80% for the first year currently while fixed rates packages can start from around 1.20% for the first year.

2. Personal Loans

Covering the gamut from renovation to furnishing to consumption loans, they typically have an effective interest rate of 10% to 15%. Watch out for low advertised rates that come with a “processing fee” or are flat and not effective rates, which will raise your true cost of borrowing.

3. Credit Cards

Annual interest rates still hover around 20% to 24%, making credit card borrowing the most expensive form of consumer borrowing out there (other than going to a loan shark!). If you have outstanding credit card debt, it makes sense to do a balance transfer, or take out some other form of personal loan to repay it.

Is now the best time to borrow?

It is clear that interest rates have been unnaturally low for an extended period of time thanks largely to the Quantitative Easing program (known popularly as QE1 and the follow-on QE2) of the United States Federal Reserve, which has pumped a huge amount of liquidity into the system. Interest rates in Singapore are heavily influenced by rates in the United States as our central bank (the Monetary Authority of Singapore) does not attempt to control rates but instead relies on the exchange rate as its primary monetary policy tool.

When making any borrowing decision, do not assume that interest rates will stay low forever. The United States Federal Reserve is scheduled to end its program of support for the American economy (QE2) in June, and it is not clear whether policymakers will decide to continue additional monetary stimulus. If not, interest rates could rise. Meanwhile, many central banks around the world are raising their domestic interest rates to combat rising inflation.

Beyond low rates, before borrowing money you should examine whether you really need to do so and what your current debt servicing ratio is. For property investors, while the current gap between rental yields and mortgage rates may be seductive, do not base your calculations on a permanently low interest rate. For home buyers who are buying for your own stay, you may want to consider a fixed rate package to lock in the current low interest rates and reduce the future uncertainty of your mortgage payments if interest rates spike.

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