Just last week we talked about how many in the market get all too caught up with the frenzy of so called “1% home loans” (in the first year) without due consideration on the tradeoffs, this week we ourselves are pleasantly surprised by the lastest salvo from StanChart – a 1% home loan yes but this time with no lock-in! And no catch.
*Note: This 1% package from SCB has finally ended its run on 11 Jan 2017 (official end date 15 Jan 2017). Earlier due to overwhelming response, a 2-year lock-in has been introduced with effect from 23 Nov 2016.
Kudos to StanChart for this bold move that is going to pay huge dividends to the bank. In a way it vindicated our stance here at MortgageWise for not promoting the 1% home loans for months now, against what most of our competitors are advocating. Finally we see the wisdom of one lender who is willing to offer something of genuine benefit to homeowners, especially those with sizeable loans. We now join in the chorus for 1% home loan (with no lock in) as the best floating rate package in the market in a still uncertain interest rate environment going into 2017.
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It is still unclear which way interest rate will go and hence the best strategy is to stay nimble. So should one take up a fixed or floating rate mortgage now? Take the case of a typical loan of $700,000. The difference between the best fixed and floating rate now is 1.60% (eg.Maybank 2-year fixed) less 1% in the first year, or 0.60%. On a straight-line basis, this works out to a savings of 0.60% x $700,000 or $4,200 savings in the first year alone, should one opt for 1% home loan. This is of course provided that the loan peg in this case, 48FDR, or StanChart’s 48-month fixed deposit rate remains unchanged at 0.50% throughout the first year. We do see that as a huge possibility given the slow pace of recovery and the likelihood of perhaps only one rate hike in December and maybe another one in 2ndhalf of 2017. Remember SIBOR would have to move first following interest rate hikes in the US. And we like to believe even when banks in Singapore start to move up their DMR (Deposit Mortgage Rate) or deposit rates, the local banks who are market leaders would go first. Which means if you are on StanChart’s 48FDR, you may be the last few to move. And even if there are two corresponding increases of 0.25% each round you will end your first year at a rate of 1.50% which is still lower than the prevailing fixed rate.
Another interesting feature of this package is the “constant spread” feature of the loan where the spread is fixed from the 2ndyear onwards till the last year, at 48FDR + 0.90. This is how we see the bank benefiting in the long term. As the spread does not “step up” to a higher rate after the initial years (normally the case for most packages), there is no real need to refinance out. Yes prevailing interest may be on its way up, but at such snail pace and given the stability of a DMR loan peg which theoretically would lag behind any movements in SIBOR first, homeowner will rest easy knowing that the interest he is paying is inline with any rise on prevailing interest, or maybe undershooting that. To put it in another way, even if one does shop around for lower rates at some point, he is going to find little difference in the rates offered by other banks versus what he already enjoys as constant spread with StanChart. The only exception is when he wants to switch over to fixed rate mortgage say two years later when it becomes clear that economic recovery is gaining traction and rate hikes are gathering pace. The bank also benefits with a bigger market penetration and earns from a bigger base of loans instead of through interest margin.
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With a no lock feature, the 1% home loan offer from StanChart seems a no-brainer. Probably the only two objections one could think of would be:
1. As 48FDR Is Controlled By The Bank, What If It Rises Too Quickly?
That is why we have resisted recommending “1% home loans” until now – where there is no lock-in. This makes a whole world of difference as the bank will need to consider very carefully before raising its DMR. First unlike traditional BOARD rates, DMRs or in this case 48FDR, are published on the banks’ website and any changes will be picked up by the media or mortgage fraternity. It is a very visible loan peg. Second, any raise that is unjustified or that comes too soon for one’s liking, the bank need to brace itself for potential backlash like quick attrition of accounts leading to an immediate drop in interest income. By doing a no lock, we can infer from this act alone that the bank is not about to shortchange itself as it needs time to recoup the “margin foregone” in exchange for a bigger loan book.
Yes DMRs just like BOARD rates are controlled and set by the banks. However as long as one is not “locked in” he will still hold a trump card, even when it comes to negotiating for a good repricing offer. It can still be a win-win deal for both lender who gets the volume and borrowers who get the lowest interest and choose to stay on. Such is the beauty of free market where there will always be another bank who values your business more. When it comes to mortgage planning you should work with a professional mortgage distributor and consultant who always take care of your interests and help monitor rate movements closely, and changes in lenders’ packages from time to time. In fact if you contact us now, we can throw in a MortgageWise Special that helps you save even more (only available to those who apply for the loan through MortgageWise). Find out more details from our consultants.
2. I Will Not Be Able To Lock In Low Fixed Rates Later When Interest Rises
This is a valid concern. We recognize there would be homeowners who value the peace of mind that comes with a fixed monthly repayment where there is no need for any guessing game how rates would move. For this group we say just go for the absolute lowest fixed rate, ie. a 2-year fixed rate at 1.60-1.65% right now. By default fixed rate implies paying a slightly higher premium above prevailing rates in exchange for locking down the rate for next two years. What that means is that one would enjoy interest savings the moment rates trend up, but conversely should rates plateau at the same levels or worst go south, he would have paid the premium for nothing. That is the dilemma homeowners face today.
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As the rate outlook is still cloudy following Brexit, there is some wisdom in realizing immediate savings (bird in hand) at 1% until it becomes clear that it is time to switch to fixed. Now if that takes two years for the dust to settle on the eventual pace of rate hikes, during which time rates continue to languish at current levels or rise just a little by say 25 basis points (0.25%), one would have gotten the best overall deal as to enter into a 3-year fixed rate mortgage at the end of a two-year wait, albeit at a slightly fixed rate. Remember as there is no lock-in, one has the flexibility to decide at which point to make this switch, or even to stay put on constant spread if global economy continues on the same low growth path.
One final word of reminder – for refinancing cases there will be a clawback of legal fee subsidy should one refinance out within three years. This is a standard practice amongst all lenders in Singapore, so it is not a catch. And it is different from a lock-in prepayment penalty of 1.5%. Just be prepared to pay back this legal fee subsidy which just eat into the interest savings in the first year. But as we have put to you earlier, there may not be a real need to do that if you are on a low constant spread package.
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.