By Dennis Ng

INTEREST rates on housing loans are at their lowest levels in the last 46 years.

Recently, the SOR (swap offer rate) even fell into negative territory, something that no one might have thought possible as it basically means that if interest rates are negative by a sufficient margin, borrowers can end up paying close to zero interest rates on housing loans packages pegged to SOR.

What is the Sibor and SOR?

Sibor, or Singapore Inter-bank Offered Rate, is the interest rate at which banks in Singapore lend to and borrow from one another. It is an average market interest rate announced by the Association of Banks in Singapore daily. The SOR is basically the Sibor factoring in a US dollar to Singapore dollar conversion.

The SOR can be higher or lower than Sibor, but because it involves a US dollar to Singapore dollar conversion, it tends to be more volatile than Sibor and is affected by exchange rate movements.

But, if you hope to pay zero interest rates on housing loans, you are likely to be disappointed because during unusual times, banks could invoke a market disruption clause to change covenants to introduce a floor for interest rates. Other bankers note that a metric that is less volatile than SOR, such as the overnight Sibor, could be used.

Actually, with the latest inflation rate in Singapore at 5.4 per cent, if you pay, say, a 1.4 per cent interest rate on your housing loan, you are effectively paying a negative real interest rate of 4 per cent. You actually gain 4 per cent because the dollar you pay to the bank one year from now is actually worth 5.4 per cent less, while the bank only charges you a 1.4 per cent interest rate.

Thus, low interest rates are good news for borrowers and bad news for savers. Imagine if you earn a one per cent interest on fixed deposits - you are effectively losing 4.4 per cent if inflation stays at 5.4 per cent per year.