Two weeks ago DBS revised their interest rate for all their FHR (Fixed Deposit Home Rate) mortgage loan packages.

What is interesting to note in this 2^ndrevision since the launch of FHR in Jun 2014, the bank has once again decided to hold the FHR (or average of the fixed deposit rate for 12-month and 24-month deposits in the $1,000-9,999 band) constant at 0.40% p.a. and choose instead to increase the spreads in the 1^stthree years of the loan by just 5 basis points from +1.05 to +1.10.  The bigger impact is felt in the T/A (or thereafter) rates from year 4 onwards where the spread was substantially increased from +1.45 to +1.60.

A little bit of background here for those who are new to this FHR.  DBS launched this new peg for home loans – a first in Singapore, on 17 June 2014 and was met with mixed responses from market and largely shrugged off by its competitorsI would say based on interviews reported in news.  FHR at the launch then was at 0.40% based on fixed deposit of 12-month at 0.25% p.a. and 24-month at 0.55% p.a.  Compare that with 3-month sibor which was at 0.40376, and which has since shot up to over 1% now.  Yet DBS which last adjusted their fixed deposit rates back in 2012 has left FHR unchanged during this period.

What the bank has done though – it has increased its spread for FHR-peg housing loans twice.  Sibor started trending up steadily from November 2014 onwards.  DBS made the first move in January 2015 this year by increasing its spread for the 1^st3 years of the loan from +0.85, +0.95, +1.20 to a constant spread of +1.05 throughout.  It also increased the T/A spread by 20 basis points from +1.25 to +1.45.  As covered at the start of this article, the FHR spreads have now been increased to +1.10 in the first 3 years of the loan and +1.60 from year 4 onwards (T/A).

What does this mean for borrowers?  First, with unabated rise of the sibor since the start of the year, some may already be shooting themselves in the foot for now locking in FHR home loans at lower spreads last year while they can.  Had they done that, with FHR being held constant at 0.40, they would still be paying only FHR+0.85 or 1.25% p.a. in their 1^styear!  What we are saying is this – based on what we have observed as the bank’s strategy going forward (at least in the immediate 6-12 months until sibor goes so ridiculously high that local banks would have no choice but to increase their fixed deposit rates in order not to have deposit outflow to foreign banks), it pays for one to lock in earlier than later if you are thinking of refinancing to a FHR-peg DBS home loans.

And what is the bank’s strategy so far.  Simple, hold on and maintain the fixed deposit rate for as long as possible (for obvious reasons as that is their cost of funds) and if sibor continues to trend up from here just increase the spreads in subsequent revisions.  That is indeed a clever strategy as with sibor rising and many borrowers already over 2% p.a. on their next sibor fixing date, DBS can increase their promotional spread for 1^st 3 years and still offer an attractive rate vis-à-vis what the rest of the market can offer.  Take for example even with the latest revision to FHR+1.10, the rate is 1.50% p.a. which is below the 3 year fixed rate now averaging 2.20%!

We have already forecast the rise in fixed rates to above 2% p.a., and we have stated in earlier blogs that when that happens, we will start to look at merits of certain floating rate packages and we are now of the view that FHR, being a more stable peg that lags behind the sibor in both a rising and declining interest rate regime, is a good alternative to fixed rates now.  And now might be the best time for you to come in as the spreads, though already risen, is still low enough to offer an attractive overall interest of 1.50% p.a.  Essentially you are taking a bet that in the next 2 years as sibor firms up further, DBS might be forced to raise their fixed deposits and hence FHR twice and with a 25 basis points jump each time, ie. FHR will then reach 0.90 and your interest rate will be still just 2% p.a. at end of 2 years.  That would mean loosely an average of 1.75% p.a. interest over the next 2 years depending on the timing of the hike, which would be more or less equivalent to locking down a 2-year fixed rate package today.  However the difference is this – you would have locked yourself into a contract with the bank for a +1.60 T/A spread from year 4 onwards based on FHR peg!  For that reason I think it is worth a bet.

From what we hear from clients, DBS is offering some existing clients FHR + 2.25 for T/A spreads.  It is only a matter of time that they start increasing their T/A spreads from +1.60 to +2.25 for new mortgage customers to the bank, already they are doing that for their new fixed rate packages.  And how soon that happens hinges on the pace of sibor rise.

We think FHR is such a good peg and mortgage strategy that it will eventually force some other local banks to follow in DBS footsteps, or risk outflow of mortgage loans.  When that happens remember you heard it from us here first.

At MortgageWise.sg, we seek to provide thought leadership in the area of home loans 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.