SOR at new low of 0.67%

SOR just broke through the previous recorded low of 0.68% set on 27 Nov 2008 to hit 0.67% on 27 May 2008, exactly half a year later. One of the driving factors for this is of course is the diving Libor, which happens to be hovering at a range (0.66-0.68%) similar to SOR. The fall in Libor itself may be attributed to cash infusion from the Fed and overall reduced risk aversion.

Meanwhile, the ten year treasury yield continues on an upward trend due to the US borrowing spree, though this is expected to be kept in check by a protracted exit from the recession and falling inflation. The treasury yield and Libor are somewhat linked, with the treasury yield leading, though this is not a strong correlation.

Here is what an analyst has to say about the dollar, treasuries and US government credit rating. Basically, the US dollar is already falling, and we have already seen that treasuries are also on the decline, sending yields higher. Lower confidence in the US government’s ability to repay debt will send interest rates higher as people seek higher returns for taking up more risk. Iceland is the classic example.

Coming back to interest rates in Singapore, it’s interesting to note that SOR has once again fallen to the same level as SIBOR, which is relatively rare. At this level, my home loan rate would be 1.45%, just slightly higher than those who took up the home loan that is pegged to the one month SIBOR, at 1.3%.

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US mortgage rate falls to record low

Quite a bit has happened in the past few weeks. The Federal Reserve took the unconventional step of buying treasuries in a bid to lower interest rates. It seems to have worked, as mortgage rates in the US to fell to a record low. Analysts expect Bernanke to continue buying treasuries and keep rates low. Nevertheless, there is always the possibility of the treasury bubble bursting. Bernanke himself came forth with a statement on the need to unwind the quantitative easing measures applied currently and combat inflation once the financial crisis is over.

SOR continued climbing this week, touching 1.37% on 31 March before receding back to 1.18% on 3 April. It is likely to come down in accordance with generally lower rates in the US. Sibor (3 months) on the other hand continues to hold steady at 0.69%. This proves to be a boon for mortgagees who have taken on the Sibor-pegged home loan. One bank even offers home loan pegged to the 1-month Sibor which is currently at 0.44%. With the 0.8% margin that the bank charges on top of the Sibor, the overall interest rate is only 1.24%. Sounds like a pretty good deal indeed. The deciding factor i will have to weigh before doing a refinancing is whether overall, taking into consideration the difference in interest rate and the legal fees incurred for the new loan, i will reap much more savings over my current loan. Based on the current SOR (3 months) and Sibor (1 month or even 3 months), the answer is a resounding YES. Looks like I should decide on this matter soon.

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SOR rising steadily

SOR has been on the rise, probably in tandem with Libor as well as USD/SGD exchange rates, while SIBOR continues to hold still at 0.69%. This highlights the difference between market vs. policy driven interest rates. In the past few days however, money market rates have fallen ahead of the US Fed meeting as they anticipate moves to keep borrowing costs low and spur lending.

Meanwhile, in the midst of supposed signs of rebound, the level-headed Jim Rogers gave warnings on impending inflation as “governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure”.

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My Home Loan Report Card

My 4th and last SOR pegged Home Loan repricing for the year has just come to past. The re-priced interest rate moved up by 0.16% compared to the previous rate, which is a pity, but on the whole it is still not too bad. The chart above shows my home loan interest rates over the past year.

When the next re-pricing comes, my contract stipulates that the margin the bank charges will increase from 0.65% to 0.75%, which is quite significant. Nevertheless, it seems like it is still a better than what banks currently offer. Having completed the one year lock-in period, I will be free to consider refinancing again. Time for some legwork..

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Home loan rates on the rise

Having done the latest round of online survey, i noticed that generally home loan rates are on the rise. Given that SIBOR is quite low now, banks may be making up for it by charging a higher margin. Even though many loans are tied to SIBOR, I suspect that the funds made available for home loans are not necessarily obtained from SIBOR linked sources and may come with a higher cost, which banks will have to recover by charging higher interest.

A round-up of official policy rates show that the policy rates are generally low. The 3 months LIBOR is at 1.25%. SOR ended the week slightly higher. Meanwhile the bond market bubble seems to be bursting. With government bonds not doing well, it is little wonder that people would shun mortgage-backed securities altogether, which in turn is “threatening to hinder America’s efforts to hold down home loan rates”.

Gold became the latest safe haven, rising above USD1000 for the second time in history and showing signs that it remains bullish.

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Honda Jazz 2009 Update Review

Time for a report card after 2 months of driving the Jazz. The mileage did not improve very much, sad to say, averaging 13.5 km/l, and this is with rather careful driving and deliberate effort not to rev up the engine too much. I still think this will improve over time, hopefully hitting 14 km/l within the next few months.

Some tips on mileage improvement – use the paddle shift. In the first and second gear, i found it appropriate to shift up to the next gear when the engine hits 2.2k rpm. From first to second gear, apply pressure on the accelerator to maintain 1.8k rpm and above to avoid losing a lot of power.

One thing i found annoying was when going up a long slope, the auto transmission shifts up from third to fourth gear too early, resulting in loss of power before the slope is overcome. Might have to experiment with down shifting the gear.

For more tips on improving mileage, check out this article. Know your car, know your route.

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Car Loan Redemption Penalty

When signing up a car loan, typically you are subjected to a redemption penalty if you choose to redeem the loan before maturity. The redemption penalty is calculated based on the method of Rule of 78.

If you are interested in just getting a quick feel of how much redemption penalty you will have to pay on your car loan, skip to paragraph 5. Read on if you are interested in more background information.

According to the wikipedia entry on Rule of 78, apparently the number 78 might have come from the sum of numbers 1 to 12 (i.e. 1 + 2 + “¦ + 11 + 12 = 78). This method of calculating interest came about to simplify the calculation of the unearned portion of a loan’s interest in the pre-computer era, and continues to be used today for precomputed loans whereby the total interest chargeable on a loan is calculated and fixed before the loan is made, which is how car loans are made.

Here is how the rule of 78 works in a car loan. The rebate on unearned interest is calculated as:

RuleOf78

where n is the remaining number of months for the loan and N is the total number of months the loan period spans. The total interest is the interest rate multiplied by number of years of loan multiplied by loan amount.

This means that the loan redemption penalty is calculated as the remaining interest to be paid minus the rebate on unearned interest, which is as follows:

RedemptionPenalty

Applying this formula, the following tables are derived showing the percentage of the total interest that will be charged as redemption penalty at the end of each year for 10, 7 and 5 years loan respectively.

Yr 1 25.1%
Yr 2 28.7%
Yr 3 30.6%
Yr 4 31.0%
Yr 5 29.8%
Yr 6 27.0%
Yr 7 22.6%
Yr 8 16.7%
Yr 9 9.1%
Yr 10 0%

Yr 1 26.8%
Yr 2 30.4%
Yr 3 30.8%
Yr 4 27.9%
Yr 5 21.8%
Yr 6 12.5%
Yr 7 0%

Yr 1 28.6%
Yr 2 30.9%
Yr 3 26.9%
Yr 4 16.6%
Yr 5 0%

As you can see, the redemption penalty is steep. Worse still, it doesn’t reward you for staying on longer with the loan. The bank and car sales agent is guaranteed to earn a commission of close to 30% of the total loan interest the moment you sign on the dotted line. Go figure.

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Falling bond prices send yield higher

Bond prices fell following the US Treasury announcement to issue more bonds and more frequently, sending the ten-year note yield above 3%. Even the shorter-term 2-year note yield and the Libor 3-month rate have been trending up. These would have immediate impact on home loan rates. A quick check at the local interest rates – 3-month Sibor still remaining at a low of 0.69% and 3-month SOR at 0.91%, looks like low interest rates are still intact for now. Central banks worldwide continue to suppress interest rates in a bid to stimulate the economy and it remains to be seen how these effort will play out in the face of market forces.

What could be more worrisome is that “traders believe a further rise in long-term yields could compel the Federal Reserve to fulfil its recent statement that it is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets”. This is in effect quantitative easing, i.e. printing money, which could lead to inflation in the long run.

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Calculating car depreciation

When is a good time to change your car (in the Singapore context)? That is a question that begs understanding for all cost conscious car owners. The short answer is: when the depreciation rate of your car starts to plateau, and the next car does not impose a high depreciation rate.

You say, wait a minute, isn’t the depreciation of a car a fixed value – car price at point of buying minus car price at point of selling divided by number of years? This simple formula may be good enough if you paid for the car in full with cash. However, most people finance the car purchase with a loan, and the loan interest as well as redemption penalty becomes a significant factor which adds to the cost of ownership or depreciation of the car.

Here is how i work out the depreciation of my car. First, a listing of all the relevant parameters:

  • Car price – 57000
  • Loan amount – 55000
  • Interest rate – 2.35%
  • Loan period – 96 months
  • OMV – 19038
  • COE – 13801

Next, some estimated parameters:

  • Beginning body value – 16000
  • Body value at 10 years – 3000
  • Cost of maintenance (see table below)

With these parameters, i derive the following table showing the car depreciation which accounts for the loan interest, loan redemption penalty as well as maintenance cost (running costs such as insurance and petrol are excluded):

Yr COE Rebate PARF Rebate Paper Value Body Value Total Value Interest Paid + Redemption Penalty Mainte- nance Depreciation (Loss/Year)
1 12,420.90 14,278.50 26,699.40 14700 41,399.40 3,997.42 600 20,198.02
2 11,040.80 14,278.50 25,319.30 13400 38,719.30 5,671.01 300 12,125.86
3 9,660.70 14,278.50 23,939.20 12100 36,039.20 7,088.76 400 9,483.19
4 8,280.60 14,278.50 22,559.10 10800 33,359.10 8,250.68 500 8,097.90
5 6,900.50 14,278.50 21,179.00 9500 30,679.00 9,156.76 400 7,175.55
6 5,520.40 13,326.60 18,847.00 8200 27,047.00 9,807.01 400 6,693.34
7 4,140.30 12,374.70 16,515.00 6900 23,415.00 10,201.42 400 6,312.35
8 2,760.20 11,422.80 14,183.00 5600 19,783.00 10,340.00 400 5,994.63
9 1,380.10 10,470.90 11,851.00 4300 16,151.00 10,340.00 300 5,721.00
10 0 9,519.00 9,519.00 3000 12,519.00 10,340.00 300 5,512.10

Plotting the depreciation in a chart:

As you can see, the rate of depreciation is the highest in the first few years, meaning you lose the most money when you sell you car within the first few years. When you get to the third or fourth year, the loss from selling the car becomes more acceptable.

Of course, whether it makes sense to get the next car also depends on the cost of COE at that time, or even the car technology which may help you save fuel costs.

Are you interested in calculating your car depreciation? The spreadsheet for calculating car depreciation will be put up as soon as it is ready.

Update: the spreadsheet is now ready!

Update 14 Mar 2015: the spreadsheet is no longer maintained

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