In keeping with our mission here of providing transparent and accurate information of all home loan packages for homeowners in Singapore, we need to tell you about DBS’s (under the brand of POSB) new tactical promotion of a 1% fixed rate from 1 to 20 May, even though much to our chagrin the bank has chosen not to pay us, external distributors, for this package. It happens from time to time when banks launch tactical promotions for limited period. In fact some mortgage brokers may not even want to tell their clients but at MortgageWise.sg, we choose to be transparent and always taking care of clients’ interest first even if it means no business for us.
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By doing so we do face a conundrum here. It is only right that when the bank decides not to distribute a particular package through us, we do not need to advertise, market or even explain how it works. We would just need to inform clients there is this package at the moment but they would have to approach the bank directly and find out all the details themselves. Yet we know full well that clients would still ask our opinion on the package and how it compares with all the other packages out there that we are being paid to market. How do we solve this problem?
The truth is we can’t. We do recognize the bank has its preprogative to decide which packages it likes to distribute via external distributors, and which ones not to. All that I can do, to be fair to my team of ernest and hardworking consultants here, is to give our general unbiased opinion of this package in this blog and show how it compares with the nearest competitive packages out there, then leave the market to decide. Hopefully that will take the load off my team in terms of having “to explain and analyze” the package when they are not being fairly compensated for the time and effort. That will be the aim of this article.
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Let’s begin. Now 1% fixed rate sounds crazy when you consider 3M SIBOR (the benchmark cost of funds in Singapore) is probably also around this figure. So is this just a gimmick or for real? Let’s take a look at the package in details (as shown on POSB website):
(Source: From POSB website as at 1 May 2016)
What we see here is that the bank is doing a “loss leader” with this May Day home loan promotion to get more market share. Is there a catch? In our opinion there seems to be one – in the form of a 3 year lock-in (if this is just the usual 1-year lockin we will say quickly grab!) By offering a super-low rate of 1% fixed rate in the 1st year, the bank needs to make back from borrowers from the 2nd year onwards provided they can lock them in for at least 2 years on a floating rate package. The DBS home loan package that we actually recommend the most is their no-lock constant spread floating package (FHR18+1.20 throughout) which we deemed as one of the best in the market now. But to be fair, if one’s view is that rates will not rise up at all over the next 3 years and DBS will hold its FHR18 mortgage peg pretty much constant over the period, this is definitely a winning proposition ,especially when it comes with the same constant spread throughout feature.
For the majority of our clients who are doing refinancing, let us now take a look at how this May Day package stacks up against the lowest 3-year fixed rate in the market and the lowest floating rate package (which will be SIBOR at the moment) that come with legal subsidy. Note that we are not comparing 2-year fixed rates which will be even lower at 1.85% currently offered by 2 banks, as we need to compare like-for-like with the 3-year lockin period.
SIBOR has retreated in the past month leading to a drop in rates across the board for most packages in the market including fixed rate. However we still maintain our view that rate is on the rise over the next 3 years unless one thinks that oil is going to stay depressed at current levels for next 3 years and inflation will not rise up in US. Suffice to say in this comparsion above, we are already taking the most conservative of all views that rate will rise up by only 1 round of hike per year at 0.25% p.a.
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At such a slow pace of increase, the difference between May Day package’s average 3-year and the 3-year fixed rate of 1.99 is really marginal at 0.04%. By having lock-in of 3 years, one loses the flexibility of refinancing out (not even repricing) should all bets go wrong and rate hikes gathers pace much quicker down the road. We have to leave it to our readers to decide. UOB home loan’s new SIBOR packages are one of the lowest in market for floating rates at the moment, and it comes with just a 1-year lock. Should one then even go for fixed rate or floating rate if one’s view is that rates will not rise as quickly? That is another thing to ponder over. And before we end, just to provide another option, DBS itself currently runs the same 3-year fixed rate at 1.99% package (pegged to DMR instead of SIBOR) but it does not come with any cash rebate.
Perhaps the best way to decide is to first determine one’s outlook on interest. The mortgage market has become more complex in Singapore with TDSR framework, new DMR (Deposit Mortgage Rate) home loans as alternatives to SIBOR packages, and the choice has become less clear for many, not to mention attention-grabbing headline rates like 1% fixed rate or 1.44% Year 1 rate for SIBOR loans recently. We do hope the market sees the value-add from independent mortgage consultants like ourselves who help to cut through all that clutter, and we certainly hope lenders in Singapore also see the benefit we bring as a more efficient and convincing platform for distribution of mortgage solutions, serving as an extension to their internal distribution network which inevitably comes with certain limitations.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective on all home loans Singapore including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.