Analyzing Published Rates

1. CPF rate: It is the deposit rate that one will receive for his/her funds inside the CPF Ordinary Account. As stipulated by the CPF Act, the minimum CPF interest rate is 2.50% p.a. This means your home loan interest rate will not drop below 2.50% p.a. Thanks to the government, however, this is also the most stable rate and has been at 2.50%p.a. since July 1999.

This option is most suitable for the risk-adverse, who wants to know how much they are paying.

2. SIBOR and SOR: They are more volatile (see Chart 1) as they reflect the state of the economy (i.e. rates will be higher during the boom and lower during the recession). The borrower will decide how frequently they want to revise their interest rate. A 12-month Sibor will be higher than a three-month Sibor as the interest will be locked for one year before it is revised again. It is the same for SOR as well.

Pegged To Economic Performance

Chart 1

We observed from Chart 1 that both rates peaked during September to October when the financial crisis became prominently visible with the collapse of major investment banks like Lehman Brothers. During this period, there was a severe shortage of cash and banks were skeptical about lending. This prompted a sharp spike in interest rates.

But the situation changed when central banks worldwide started slashing interest rates in their bid to ease the tightening market and improve liquidity. Some banks, including the Bank of England and the European Central Bank have now raised rates in accordance with the recovering economy but interest rates still remain at very low figures.

In Singapore, since Jan 2009, the 3-month Sibor has stayed at a low rate of 0.69%.