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This week StanChart launched the lowest floating home loan rate in the market at 1% at last, valid for the month of October for completed properties and for loans above $800,000.  Is this a good choice for those looking for new purchase loan or refinancing?

The answer is a resounding – Yes!  We think this is the lowest we could get to for new mortgage signups. Let’s take a look at the package:

STANCHART FLOATING RATE FDR PROMOTION

Year 1	1.00% (36FDR + 0.28%)
Year 2	1.00% (36FDR + 0.28%)
Year 3	1.00% (36FDR + 0.28%)
Year 4 onwards	1.40% (36FDR + 0.68%)
Lock-in	2 years
Minimum Loan (To qualify)	$800,000
Legal subsidy (For refinancing only)	0.40% of loan capped $1,800
Valuation subsidy (For refinancing only)	Up to $1m: $350 Above $1m: $500
Other Features	One free conversion at end of lock-in period

*36FDR is currently 0.72% (last revised down from 1.02 on 21 Aug 2020)

For those who are new to FDR, or Fixed Deposit Rate, home loans, first a quick introduction.  DBS pioneered the move to peg mortgage loans to fixed deposit rates called FHR back in 2014.  The appeal was that deposit rates were known to stay low in Singapore for many years after the 2008 financial crisis, hence indexing home loans to it offers stability and slow rise in interest. The market took to it by storm and in two short years, all the major lenders in Singapore had introduced their own versions calling it by different names from FDMR, FDPR, FDR, to TDMR, etc.  Collectively, we refer to them as FDR home loans (so as not to confuse with fixed rates).  However, after nine rounds of rate hikes by US Federal Reserve from 2016 to 2018, many homeowners saw their mortgage interests skyrocketed as banks started revising FDR pegs higher a few times within the same year, especially in 2018.  To be fair, that same year saw US Fed hiked rates four times with a quarter percentage point increase at every quarter.

Since the start of 2019 (even before Fed started to cut rates from July), we have shifted to recommend SIBOR home loans as opposed to fixed rates or floating FDR home loans. Our reasoning is that with rates crashing down in a post-covid recessionary climate, SIBOR is the only home loan where homeowners will reap immediate savings with any significant drop in interest rates.  We do not recommend fixed rates until such time it drops to an equilibrium level of 1.25-1.35% (looks like it can drop even lower now with loans above $800,000 already at 1.18%).

We also will not recommend FDR home loans post-covid as signing on FDR is like signing on a fixed rate as the bank will not move the peg down which means less margin.  

Not until such time it reaches what we think is the “equilibrium level” for prevailing floating mortgages rates in the market. 

This latest move by StanChart has precipitated that outcome – a 1% prevailing rate for home loans.  We hope eventually all banks will come on board offering home loans at 1.00-1.10% (even from $500,000 up) which is exactly what happened in the period after the financial crisis between 2009-2014.  Nobody was interested in fixed rates then.  Nobody wants to pay a premium for fixed rates when interest rates were simply not going anywhere.  It’s déjà vu all over again.

More specifically, here’s 3 reasons why we like this latest FDR home loan package by StanChart:

1. It gets even better now

Speaking about déjà vu.  For those who remember, this is not the first time that StanChart has launched an aggressive 1% home loan promotion.  Back in 2016 Oct, it shouted a Year 1 headline rate at 1% (also on FDR) and did fantastically-well for the quarter – outselling almost every other bank.  However, the rate went up to 1.40% from the 2^nd year onwards.

This time round, we think, the deal is even better as it’s 1% home loan for the first three years of the loan tenure!  That’s a long time we think.  You’ll be out of the lock-in period which is just two years.  And it almost guarantees that you got the lowest it can get to for mortgage rates in the next few years, as we don’t think new signups for SIBOR home loans can go below 1%.

2. FDR home loan at 1% is “almost like” a fixed rate!

First.  Let me be clear – FDR is not a fixed rate!  It’s still a floating rate pegged to a fixed deposit tranche, and in this case, the 36-month tenor published on Stanchart’s website (currently 0.72%).  But it will behave like a fixed rate (our opinion) over the next few years!

Understand that the biggest difference is that we are at a very different point in the interest rate cycle (see SIBOR in the chart below) compared to 2016 when FDR first became ubiquitous.  2016 was also the year that SIBOR started its ascend following the historical first rate hike in Dec 2015. Contrast that with the situation today when US Fed has just forecast near zero interest for the next 3 years until 2023. Interest rate is not going to move up any time soon.

And if interest is going sideways and banks finding themselves hard-pressed to justify any increase in deposit rates, signing onto a floating FDR package set at 1% for the first 3 years is like locking down a 3-year fixed rate at 1%!

3. A bet that’s hard to lose 

I hear you.  What if the bank decides to hike 36FDR despite interest environment remaining subdued.  Can the bank do that?  Sure it can as it’s a floating rate package.  StanChart has in fact announced on its website that it no longer takes in new fixed deposits of more than 9 months’ tenor.  This means that going forward FDR mortgage pegs (all pegged to tenors of more than 9 months, see Chart below) will likely behave no different from a lending peg, or BOARD rate if you like.  

Still, we trust the good sense of the bank not to cause a huge outroar by hiking interest rates against all odds in a post-covid recessionary environment when customers are going through challenging times. In fact, MAS is cracking its head now how to unwind or taper off covid relief measures for mortgage loan deferment.  Any attempt to jack up BOARD rates for mortgages by any banks in the next 12 to 24 months will certainly be “frowned upon” and hard to justify.  For this reason, we came to the opinion – signing on this floating FDR package is almost like signing on a “fixed rate” at 1%.  When rates are neither going up, or down (already at the lowest point of 1%) – there’s no difference really.

What if we are all wrong here?  US Fed starts to hike rates earlier than thought.  Or if the bank decides to hike FDR despite all the complaints?  Well, if you start from the lowest point possible at 1%, and the bet goes sour after 2 years, you would still have enjoyed a 2-year fixed rate at 1%!  Not that bad really.

The likelihood of banks raising rates within a year is almost nought.  Even if they start hiking against all odds, how fast can that pace be sustained amidst a fragile global economy?  You would most likely still be paying interests in the 1.25-1.50% which means your average cost of funds would be still super low.  And all because you start off at 1%!

It’s a bet that you’re gonna find hard to lose.  And we’ve not even mentioned that our view right now is that interest rate is likely to stay lower for longer – for a good 5 years and beyond.

For those still in doubt, the best way is to look at the track record of the bank and how it manages FDR mortgage pegs in the past.  And let the data speaks for itself.  We are probably the few brokers in town who can provide that data-driven approach in mortgage planning.  Speak to us today and let us share with you why different points in the interest rate cycle call for different strategies.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, buy your next Singapore condo or even review your commercial property loan, speak to our dedicated team of mortgage consultants here for the best Singapore home loan rates.