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3 Dangers Of FHR Home Loan

Last week we propagated all the virtues of DBS’s Fixed Deposit Home Rate (FHR) mortgage loans.  As a professional and responsible mortgage advisory firm, we would also need to highlight what we see as some of the dangers or weaknesses in this peg.  That way we give you a balanced view for you to come to an informed decision.

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There are 3 dangers for FHR loan as far as we can see.

1. The bank can still vary any of its terms including definition of FHR

I have earlier highlighted in this blog how banks are legally or contractually allowed to vary any of its terms in the Letter Of Offer (LO) to you, at any point in time, simply by serving you a notice in writing.  They have this unilateral right accorded by an “unfair clause” which you sign and agree to in all LOs.  They could for example change the way interest is calculated or even the definition of FHR which DBS has already provided for in all marketing collaterals in fine print :

“FHR refers to the average of DBS Bank‘s prevailing 12 month and 24 month Singapore Dollar fixed deposit rates for amounts between S$1,000 to S$9,999 or such other sum as we may specify.”

We think the biggest risk here is they could simply change the spread on your loan which could be as low as 0.85% p.a. in the 1st year for some who signed on to FHR loan last year.  One foreign bank has done that recently last month, raising its thereafter spreads for sibor-based loans unilaterally.  To be fair, this risk applies to all banks and not just DBS home loans with its FHR peg.

At the end of the day FHR is still a floating loan rate and carries more risk when it comes to adjustments in the peg itself or the rate, unlike fixed rate home loan.  Fixed is really fixed.  You can of course argue that with the same unilateral “unfair clause” even fixed rate can be changed, but we think that is more legally contentious and challenging for any bank to contemplate such a move without considering the likely negative repercussions from the market as well as from MAS.

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2. Treasury can play around with costs and margin

We talked about Pareto’s 80:20 rule earlier in this blog.  But to explain this point further, let us look at some actual figures from DBS’s latest financial statements as at end 2014 :

DBS 2014 financials


As FHR is defined based on SGD fixed deposits per se, we will look at the composite of their SGD customer deposits.  You will notice that as at 31 Dec 2014, fixed deposits of S$15b forms only 11% of their total SGD deposits of S$138b.  The bulk (72%) comes from their savings accounts which is a big surprise, most likely due to the POSB branch network.  Here already we see Pareto’ rule at work at the account type level.

There is no further disclosure on the breakdown of this S$15b of fixed deposits but we can simply assume Pareto’s 80:20 rule at work again where only 20% of this S$15b would have come from 80% of the total no of accounts of small depositors below S$10,000 (FHR definition), ie. S$3b.

The risk here would be at some point, due to some change of management decision or inclination, the bank could easily increase FHR from the current 0.40%, thereby taking a hit on costs by paying slightly higher deposit interests on this S$3b deposits which constitute only 2% of their total deposits of S$138b.  That is hardly a drop in the ocean cost-wise to the bank, but a big lever in terms of increased net interest income when you consider the revenue for the entire FHR loan asset books will be raised immediately.

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3. FHR will rise if liquidity dries up in banking system

Broadly speaking there are 2 revenue source for banks – interest and fee income.  For the longest time banks in Singapore have been growing their fee income year on year primarily because of the growth of wealth management services.  Another big reason is the search for yield since the Great Recession of 2008 where interest rate has languished below 1% for longer than usual.  It makes more sense to gear up at such low interest and divest the funds you have for investment.

With the normalization of monetary policy in the coming years more and more people will deleverage and pay down their mortgages as interest rate rises.  This will inevitably lead to drying up of liquidity in the banking system which coincides with the outflow of funds back to US in search of greater return.  All these factors should point to some upward pressure on bank deposit rates.  And the speed of such increase in deposit rates might catch market by surprise if “hot money” rushes back to US for fear of losing out on the next up cycle.  Borrowers beware.

So what we are saying here is that FHR might rise due to both action of the bank to increase its interest margin in point 2, or simply market action in point 3 when DBS is forced to do so if liquidity dries up in the system.

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 home loan 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 including packages that banks do not pay us. That’s why many have chosen to refinance home loan with us in the end notwithstanding the sheer number of brokers and agents out there.

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