At the start of this month 1 Apr 2017, there was an interesting but significant development in Singapore’s mortgage market that as thought leader in this industry, we see it as our duty to inform our clients and give our unique perspective as always.
Two of the local banks DBS and OCBC both introduced new FD (fixed deposit) tenures to peg their new mortgage loan accounts to. DBS replaced its well-known FHR18 (Fixed Deposit Home Rate) with a new FHR9 and now pegs all new home loans to its S$ FD board rate for 9-month tenure (currently 0.25%) instead of the previous 18-month (0.60%). OCBC introduced a new tenure of 48-month FDMR (Fixed Deposit Mortgage Rate) currently at 0.95%, alongside its existing 36-month FDMR (currently 0.65%) and interestingly enough, offers different interest rates for those packages pegged to 48 vs 36 month FDMR. Confused already?
Before we dive deeper, as two lenders have now re-defined their deposit mortgage pegs, and more are expected to follow suit, I take this opportunity to also re-define how we, at MortgageWise, will name and collectively refer to the category of home loans pegged to varying FD tenures going forward, simply – FDR (Fixed Deposit Rate) home loans. Period. There are many names coined in the market from FD-linked home loans, fixed deposit pegged, etc. Initially we call them DMR (deposit mortgage rates) and reframe from using the word “fixed” as many clients we spoke with have confused them with fixed rate mortgage. However after three long years (DBS first introduced it in Apr 2014) and with five banks now offering their own FDRs, we think this has become a non-issue. So let’s just call a spade a spade. FDR refers to a mortgage peg that is based on a banks’ published fixed deposit rates, and there could be different tenures used over time all from the same bank. So you can have FDR based on 3-month, 6-month, 9-month, and so on. In fact we noticed banks are starting to introduce more FD tranches (or tenures) all the way up to 60-month (we do not believe anyone will place FD of 5 years) where it used to stop at 24 or 48 month for some. What does all this mean for homeowners looking for new purchase property loan or remortgaging of an existing one?
First we need to understand the concept of FDR home loan and how is it different from the traditional SIBOR (Singapore Interbank Offer Rate) home loan. In Singapore when one takes up a mortgage on a residential property, there is a choice of pegging the interest to either SIBOR or BOARD rates in the past. We do have loans pegged to SOR (Swap Offer Rate) or some combination of SIBOR and SOR but those were stopped in recent years. In the past 10 years where 3-month SIBOR hovers perpectually at 0.40%, most borrowers prefer to peg their mortgage interest to the market-determined SIBOR rates, as this takes price-setting control away from lenders unlike BOARD rates which were determined by sole discretion of the banks. However as interest starts to rise up since end 2014, people start to lock down fixed rate mortgages instead but this usually requires one to pay a slight premium over floating rate. FDR home loans fill this gap between the need for more stability in rates (does not move up as fast or as much as SIBOR) but yet not to pay a higher interest to go fixed. This is especially so for those with bigger loan quantums. The whole argument for FDR home loans propagated by bankers is that, being a deposit rate at the same time, banks will not want to increase FDR frivoulously as it would also mean higher cost of funds. By pegging one’s home loan interest to FDR, there is assurance that though it is a floating rate, any hikes will be more measured and lagging that of SIBOR. And true enough most bankers will be able to whip out some historical trending graphs to show how FDRs have been kept to below 1% range for most parts in last 10 years even in periods when SIBOR creeps up.
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However with FDR home loans, price-setting control is back with the lenders. We have already debunked the myth that raising FDR will hurt the lenders significantly as most of their S$ funds may not even be in fixed deposits to start with, much less the “pre-selected” fixed deposit tenure that is FDR. Read one of our recent article where we give the lowdown on the banks’ deposit breakdown. As we have always said in this blog, whether FDR turns out to be a good choice or not depends largely on how banks manage them going forward, not historically. Any revision in FDR will need to be justified by a corresponding increase in benchmark interest and to occur only after a certain lag time.
For a better understanding on FDR home loans below is a snapshot of how they stack up amongst the five banks offering FDR loans at the moment:
How do we read all the latest moves by lenders this month? Well we think these are signs that the banks sense a tightening of money supply soon and are preparing for the eventual hike in FDR. As at last week 3-month SIBOR has quietly itched up from 0.94% to 0.99%. With more business lending activities in prior months as reported, and the same hawkish tone from US Fed alluding to two more hikes, it does seem to point to an eventual drying up of liquidity here in Singapore. We are only saved, I suspect for the time being, by the weakened USD in recent weaks leading to some funds flowback, but that is a whole different discussion altogether. Technically the dollar will not stay at such depressed levels against a US economy powering ahead for the 2nd half of the year, especially with risks of US-China trade wars now abating and after all geo-political risks subsided. Still at MortgageWise we think it will take a while more for us to break out of this global structural anaemic growth trap, hence we are only expecting one more rate hike in 2017 probably in September FOMC.
In an earlier article, we have forecast that banks will start raising FDR by mid of this year, not so much due to push factor, but the need to raise NIM (net interest margin). No doubt we could be wrong in our judgement, but even if USD continue to underperform with no significant pickup in SIBOR we believe banks will still face significant pressure to raise margins with rising NPL. Hence there should be one hike in FDR this year, though we cannot tell you for sure which bank first, by how much, and even which FD tenure etc. To be fair when banks do indeed raise FDR, remember it also means SIBOR would have also gone higher as well and by then everyone on floating rates would have to cough out slightly more for monthly repayments. There is no running away from it (unless one goes for fixed rate at a premium), and the crux is to pick the peg with the least propensity to move up. Now that banks have embarked on multi-tranche FDRs, we also expect rate increases not to be uniform and in fact our earlier theory that banks will make increase across all FD tenures at same time does not hold true anymore. Speak to our experienced consultants who can share with you more insights.
Notwithstanding our forecast of two rate hikes in US, and one increase in FDR this year, we need to re-iterate our stand –we still believe and recommend FDR as a more stable and less volatile mortgage peg in an interest upswing cycle. Historically FDRs have and will continue to lag behind any movements in SIBOR from 3 to 6 months or even longer, provided lenders do not mis-manage them which we certainly do not think so. Nobody will want to risk losing customers to competition by moving up its FDR too quickly. The one who can hold their FDR unchanged for the longest period will gain the most goodwill from the market. That is another reason why we recommend FDR – its highly-visible nature in the form of published board rates becomes a natural self-checking mechanisim.
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements. We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal. We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.
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