fixed deposit rate home loans

FDR Tranches

Two months ago on 1 April, we informed that both DBS and OCBC have introduced new FDR tranches for their home loans with DBS rolling out its FHR9 at 0.25% (replacing its famous FHR18) and OCBC doing likewise with its 48FDMR at 0.95% (replacing its 36FDMR).  We also speculated that the rest of the banks with FDR (fixed deposit rate) home loans will follow suit.

UOB just introduced its new FHR tranche with 15FDPR at 0.25% at the start of this month.  So now we have two lenders moving down the value of their peg (DBS moving from FHR18 0.60% to FHR9 0.25%, and UOB moving from 36FDPR 0.65% to 15FDPR 0.25%), whereas OCBC chose to go the other direction moving up their 36FDMR at 0.65% to 48FDMR at 0.95%.

What is the significance of it all?  We hear some bankers touting that it is better to go with a lower “spread” on 48FDMR for OCBC rather than the previous 36FDMR but does it matter?  Incidentally OCBC is the only one that offers the choice of pegging to either 36FDMR and 48FDMR whereas for all new loans at DBS and UOB will be issued on the newly-launched FDR tranche.

First we have argued many times in this blog that we cannot compare the “spread” (or that markup above the loan peg for example currently DBS has a FHR9 + 1.05 = 1.30% package which means the “spread” is 1.05) across various FDR home loans and even with those of SIBOR home loans as the basis is totally different.  In the past the Singapore market has been accustomed to doing that as there is only one basis – 1M or 3M-SIBOR which is a singular peg determined by the market.  Various lenders will launch promotional home loan packages with a lower spread in the first few years.  And typical a spread of 0.65 to 0.75 in the initial years would be considered fairly attractive, considering how this spread always get raised to 1.25 from the 4th year of the loan onwards.

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With introduction of FDR home loans, it is no longer just a case of looking at who has the lowest “spreads” in the initial few years.  This thinking stems from comparing SIBOR home loans and needs to be discarded.  What is the use of going with a FDR with the lowest spreads if the underlying FDR peg moves too quickly for one’s liking?  Remember with FDR home loans, price control is now back with the lenders unlike SIBOR which is set by the market.

We have also argued that it is pointless to speculate which FDR tranche be it 9-month vs 48-month that has a greater propensity to move up, and how come one bank’s 48-month FDR (SCB at 0.50) is higher in value than another bank’s 18-month FD (previously DBS FHR18 at 0.60).  Isn’t it supposed to be a higher interest for a longer-tenure fixed deposit?  Well there is no point doing that as the banks have vastly different cost structure and there is also a huge difference between local and foreign banks the latter which traditionally depended more on FD for its funding. In fact, we used to think that when banks hike deposit rates, they would do it across the board with more or less the same magnitude of increase from 3-month FD to 60-month FD.  We have now changed our view on that.  It need not be so.  With FDRs now taking on the nature of a “lending” rate more and more so rather than a “deposit” rate, banks could choose to increase certain tranches more or not to increase certain tranches at all.

It remains to be seen if US Fed will hike rates three times in a row in next week’s June FOMC.  What is certain is that, should rate hikes take place, it is about time to expect local banks to take the lead in hiking FDRs as the last hike by local bank happened back on 23 Dec 2015, more than one and a half years ago and to be fair, Fed has hiked three more times since then including the one next week. Should US Fed decide to hold off its rate hike till Sep FOMC, it will be harder to predict if FDRs will go up in Singapore soon but we think that is still a high probability. What we will be looking out for is not so much when will FDR move up, but how much the banks will decide to raise the various tranches from 9-month to 48-month when it happens.  And will the increase be uniform?  Will the lenders also raise the newly-launched FDR tranches which technically would have the smallest loan books attached to it?

Over at MortgageWise, we tracked FDR movements closely over the years.  Client who work with us can be assured of the best information on hand to make an informed decision come time to look at repricing or refinancing his existing mortgage.  So speak to our consultants today.

 

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