[jen24]

ok know some of you have mentioned this before, but i am a total layman when it comes to finance etc...! so any help would be much appreciated. basically i have to choose between HIbor or Prime with SCB, but to be honest i don't really know what the idfference is or the consequences of this except for the fact that hibor will mean a lower interest rate. does this = better?!?

[Tulip]

Hibor does not always mean a lower interest rate. There are times, though seldom, when hibor can go higher than prime. There is certainly a risk factor when choosing hibor.
Ask the bank to explain all this to you. A very important thing is to have a cap. This will limit your risks.
Good luck!

[jen24]

cheers thanks tulip!

[freeier]

the cost of a cap is too expensive. u will frankly have to give up alot for the potential of interest rate going up.

anyway, hibor is market dependent. i.e. the flow of money between the world and the market is going to determine how much hibor is. whereas prime is set by the bank arbitrarily. when hibor goes up, the cost of fund for banks go up, u expect banks will definitely raise prime rate (unless prime rate was already quite high). if hibor comes down, bank will take some time before they adjust their prime rate downwards..

so for hibor u have a higher volatility that might be affected on a short time basis (e.g. suddenly hibor very high because all the money in the market went to do ipo).

but personally i'd more likely use hibor related loan.. and if necessary lock in the rates for the first few days.

[Tulip]

What do you mean by 'the cost of a cap is too expensive'? What are for example the things I would have to give up? Thanks.

[freeier]

money! 8-P

caps are options. technically. so in order for your loan to be capped, you have to buy an option and that is reflected into your eventual interest rate (i.e. maybe 0.5% higher than normal).

to buy protection is usually more expensive. i won't go into actual pricing mechanism of option, but trust me it is always more expensive. in the market there are alot of traders making money by writing cover options...

everything is economically equivalent. the cost of borrowing, plus the profit the bank need to give you the loan.
so if you want to cap an interest rate, you either have a cap that is really at a high level that is not likely to hit (and still you are paying alot of money), or u really really pay over the norm for a loan cap at a lower price.

unless you are very very very sure rates will shoot up, else don't buy cap. but you can think about locking interest rate for 2 or 3 years..

[beachball]

Completely agree with freeier. Valued at market rates, the financial institution providing the cap/fixing always gets the better end of cap or swap (I also work for an FI - albeit in a different department).
Only caveat could be that we know nothing about the personal circumstances of the OP. In certain situations (say, few other assets, limited income, family situation, extreme risk aversion, etc.) the specific cost of financial distress could be very high and, hence, it might be worth paying to protect against the consequences of higher interest rates.
Of course, all of the above advice would go out of the window if the OP was a Central Banker and knew more about interest rate developments than the market/us... :-)

[freeier]

the surest and most economical way of limiting interest rate level is to fixed your loan at a fixed rate. as long as possible. then you have certainty that rates will never shoot up, and u have your cashflow (income) to plan. of cos u will not enjoy the downside if rates were to drop.

over long term, paying fixed rate (i.e. longer term rate) always make u lose out. short term rate is floating but on average, 80~90% of the past 10 years incidence even with the rates rise having non-fixed rate makes u better of.

[jen24]

ok wow that's quite a lot to take in and consider. i forgot what SCB offered but they said hibor + 0.5% and there was a cap, but that was all the detail i got....

[freeier]

frankly, i doubt they will give you such a good deal (i.e. hibor + 0.5% with a cap). that's just numerically not realistic.
you can take hibor as the cost of the fund to loan you, and anything above hibor as their profit. and that profit would have to take into account your probability of default, loss given default, and all of their overheads.