DBS Bank Singapore

A Relook At DBS FHR Peg

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 2nd revision 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 1st three 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.

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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 competitors I 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 1st 3 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 1st year! 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 home loan with DBS.

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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 1st 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.

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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, 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.

 

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The Now-On And Now-Off Signals Of Rate Hike

Following the latest press conference after US Fed’s March FOMC meeting, the market is treated to another roller coaster ride on the guessing of the timing for the first lift off in interest rate – June or September or later?  Evidence now suggests it might be later as Fed now downgraded slightly the economic and growth outlook due to weak exports and a sluggish housing market, evident from its downwards revision of forecast; median interest rate forecast for the end of 2015 is now 0.625% from 1.13%, and just below 2% by end of 2016.

Policy makers also reduce their forecasts for economic growth for this year from the earlier 2.6%-3% to 2.3%-2.7%. With inflation still weak they also adjusted their estimate for annual inflation down to the range of 0.6%-0.8% this year, from the previous forecast of 1%-1.6%, but unemployment rate is now expected to fall further to Fed’s long-run goal of 5-5.2% by end of the year from the current 5.5% with strong jobs growth.

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In recent months, Fed has struggled to calibrate appropriate policy response to the unusual combination of anemic inflation in the midst of a surging labor market (295,000 jobs added last month in February) which has yet to translate to strong wage growth beyond the current 2% pace.  It is believed that wages will eventually catch up as labor market tightens and companies compete for fewer workers.  When that happens inflation might finally start rearing its ugly head.  At the moment however the twin effects of low oil prices and the strong dollar which makes US imports cheap have kept inflation at bay and there is no urgent need to raise rates.

Janet Yellen re-iterated her belief that this meager inflation (at 0.2%) is “transitory” as she expects oil and gasoline prices to rebound later in the year and wage increases to show up in the data.

Overall, the Fed has indeed removed the last obstacle to rate hike by removing the pledge to be “patient” from its latest forward guidance, but cleverly managing the market’s expectation by clarifying that does not mean a rate hike in June, or neither will it rule out such a possibility.  What Fed has committed itself to is to raise the federal funds rate only when it sees further improvements in the labor market and is reasonably convinced that inflation is on its way back to the 2% objective over the medium term.

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Here at MortgageWise, we are not totally convinced that the lift off will not happen in June.  A lot depends on the economic data coming out of the upcoming 2nd quarter as Fed has cleverly negated itself of committing to a June or a September rate hike by underscoring the need to observe labor market and inflation data.  To us that is as good as saying anything is possible and it could still be June or later depending on what we see and observe in the economic data.

In keeping with our earlier forecast, we still believe that the full effects of the oil price crash will only be felt fully 6 months later which will be in this coming 2nd quarter which also coincides with the end of harsh winter months and the arrival of spring.  And given that US economy is 70% driven by consumer spending, we should see some signs of inflation gathering pace in the next 6 months though we cannot be 100% accurate.

Translating that back to Singapore market, 3-month sibor has more than doubled to 0.93 (as at 18 March) in the last 6 months and we are expecting a more gentle rise from here until it stabilizes in the 1.2-1.5% when US starts its first rate hike.  Even in the event of a delayed rate hike, we do not expect this trend to reverse and hence it does warrant a serious look at fixing your mortgage cost now in this 3 month window which we talked about earlier, before all fixed rate home loans go above the 2% p.a. level.

At MortgageWise, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner in Singapore when you buy your next property. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

 

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Banks Rushing To Raise Fixed Rate Mortgages

As what we have predicted just a week ago here at this blog – that there is only a small window of 1 to 3 months to lock down fixed rate mortgages below 2% p.a.; banks are now rushing to revise their fixed rate mortgage loans in the past 2 weeks as 3-month sibor continue its unabated rise ending the week at 0.913 {as at 13 Mar)

The market has started factoring in the much anticipated “lift off” in US interest rates in June even before it happened, with US Treasuries yields rising sharply after the latest job report last week and the subsequent sell down on Wall St. All eyes will be on Janet Yellen this week in Fed’s policy meeting for March and it is widely expected they would remove the word “patient” from its statement.

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With runaway borrowing costs for the banks, one by one Singapore banks up their fixed rate mortgage packages starting with Hong Leong Finance increasing its 3-year fixed rate from (simple) average of 1.49% to 1.72% p.a. 2 weeks ago, and that will not be the end. Next followed closely by UOB which moved its 2-year fixed to a much higher 2.18% p.a. from the previous 1.55% p.a. And this past week two more banks ended their current fixed rate home loan promotions – Bank of China (1.3% p.a., 1.5% p.a.) and DBS (1.78% p.a. for 3 years). Both will be announcing their new and higher fixed rate in the coming week.

The actions are getting fast and furious especially for the foreign banks without a huge depositor base of funds to tap from. They will have more problem hedging fixed rates from interbank markets to lend out to borrowers. In short banks’ margin for fixed rate loan will be hard squeezed which is also probably why they are more resistant to offering longer term fixed rates.

CIMB and RHB will be the next two to act this coming week with the former already announced that their longest 4-year and 5-year fixed rate mortgage will end by month-end, but that means submitting the application at least a week before which is by end of this coming week (20 Mar). RHB has also announced end to their 2-year fixed rate package (1.2% p.a., 1.6% p.a.) sometime this week. So those are out who are still sitting on the sidelines watching had better act now (even if your lock-in expires around 4 months later in Aug you are still in time, call us to find out how)

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We forecast initially 1 to 3 months for all fixed rates to go above the psychological 2% p.a. mark but from what it seems, it might be earlier than later. We now expect more banks to follow suit in the following weeks and borrowers will need to respond swiftly before losing this golden opportunity to lock down fixed rates. Work with professional mortgage brokers who can give you the lowdown on rates swiftly and deliver to you accurate and objective analysis on the best home loan solution as interest rate environment turn hawkish.

We are amazed how some analysts are still forecasting 3-month sibor to reach 1% p.a. by end of this year. In our view, 3-month sibor will continue to rise quickly and reach 1% p.a. even before June and will only stabilize in the 1.2 – 1.5% p.a. range for a long protracted period before rising at a much slower rate thereafter. In a nutshell, there will be spike up before the rate of increase flattens out as markets quickly factors in the rate hike and slowly come to terms with the new rate norm. The full effects of the oil price plunge will filter through global economy and show on economic data from spring onwards.

At MortgageWise, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner in Singapore when you buy your next property. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

 

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US Job Creation Strong – Rate Hike By June Imminent

The Bureau of Labor Statistics released a strong set of job creation figures for February where the economy added 295,00 new jobs blasting past most economist’s expectations and further raising the likelihood of an interest rate “lift off” in June. Unemployment rate fell from 5.7% in January to the lowest level of 5.5% just a tad above the recent low of 5.4% registered in May 2008. Wages though rose only a slight 0.1% in February (from the previous month’s 0.5% increase) which is the last remaining  hurdle for US Fed to watch as they ponder on the timing of rate hike when they meet for policy meeting this month.  Still with galloping economy, most expect wages to show uptrend soon as payroll increase and companies begin to compete more aggressively for talent.

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Remember we are talking about the harsh cold winter months of January and February. With the arrival of spring, economic activities and job creation will be expected to pick up further, aided greatly by continued decline in energy and oil prices.

It seems the combination of US recovery gaining traction this year, start of QE by ECB this Monday to the tune of ­€60b per month until September 2016 a significantly long time, and monetary easing by China with an outlook for more measures to spur sluggish growth have come together at the right time to boost confidence in the market. Our earlier prediction that such feel-good factor will feed itself and lead to more sustainable recovery is holding out. We also think that the oil industry is going through some structural change with shale production and oil price will not recover anywhere near to its previous high too soon if at all. At some point Chinese companies might also acquire the same hydraulic fracking technologies that US firms boasted.

US Federal Reserve is widely expected to remove the word “patient” from its policy meeting statements coming up this month, paving the way for the first lift off in federal funds rate by June.

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At MortgageWise, we have since November last year shifted our view to advocate fixed rates with the crash of oil prices. The 3-year fixed rates were at 1.4% p.a. level back then but with the persistent rise of 3-month sibor since from 0.41 to the current 0.81 (as at 6 March 2015), banks have been revising their fixed rates by the week and currently we are about to break above the 2% p.a. psychological level (Maybank latest to revise to 1.95%, UOB 1.88%, CIMB 1.88%, DBS 1.78%). Indeed rates have been hovering below 2% p.a. for the longest time since 2008 and most in Singapore have forgotten about historical average being 4% p.a. in the last 25 years!

For those looking for mortgage loans in Singapore, we now estimate a small window of between 1 to 3 months before prevailing fixed rates will all rise up above 2% p.a. in Singapore and we urge all our clients still on floating but past the lock-in period to take action now. We are of the view as long rates are below 2% p.a., at half the historical level, it will make perfect sense to lock down fixed rates for as long as possible, and for that reason we started advocating CIMB’s 4-year fixed rate at 2% p.a., especially for sizeable loans above $1m. You should do this even if you past the lock-in period for the loan, but still need to pay back legal fee subsidy if you refinance out within 3 years. We re-iterate again, for loans above $1m the savings will be huge when you lock down up to 4-5 years, many times more than the legal fee clawback you have to pay.

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The harder decision comes for some who has been given exceptionally low and long term (commonly referred to as thereafter rate) spreads for their floating rate loans during the 2009-2011 period, eg. 3-month sibor + 0.75 throughout the entire tenure of the loan. If you are on this rate, the risk to refinancing to fixed rate home loans now is that you will not be able to get back the same kind of low perennial spreads later on when interest rate comes down.   But still with sibor likely rising to 1.5% p.a. by end of the year, even with such low spreads you will be paying 2.25% p.a. within 6-9 months and going higher every year from now. It still warrants a second look to lock in 2% p.a. for next 4 years I am sure you will agree with us.

Speak to us today and let us help with your mortgage planning. At MortgageWise, we take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time around, but we would try again when your lock-in expires down the road. We strive to be your first choice mortgage partner in Singapore. Do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

 

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Should We Lock In 5-Year Fixed Rate Home Loan?

Just this week CIMB became the latest bank to fire the next salvo in the battle for fixed rate mortgage loans in Singapore – a 3-year fixed rate at 1.88% p.a., a 4-year fixed rate at simple average of 2% p.a. (1.65%, 1.85%, 2.15%, 2.35%) and most impressively the longest ever in the market a 5-year fixed rate at 2.28% p.a. for private properties. The rates for HDB are slightly higher across the board up to 2.30% p.a. for 5-year fixed.

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The market has finally woken up to the demand for fixed rates with the impending rate hike in US. CIMB has been wise not to ignore this changing need and indeed kudos to them for responding swiftly and decisively with the most aggressive fixed rate package to give the market another interesting option. Until now, most banks are reluctant to offer more than 2-year fixed rates, which if I may surmise a guess, due to the lower margins arising from having to lock in longer term funds at a higher rate from the interbank market.

The question now we get asked is should we go lock ourselves up to 5 years and pay a slightly higher rate than what is the prevailing rate now, just for that peace of mind that comes with a fixed monthly instalment? Let’s examine this question in this article.

First understand that the first pre-requisite for locking down fixed rates is that you do not envisage yourself selling the property to be financed in the next 5 years, as fixed rates always come with a commitment period of the same length where you will be slapped with a prepayment penalty of 1.5% of the amount paid down during this 5-year lock-in period. Purchasers of a new HDB or Executive Condo property will not be too concerned with that as that ties in perfectly with the minimum occupation period of 5 years.

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Most of us will not want to sell the house where you are currently staying unless you have a reason for moving, for example to get ready to enrol your child in a specific school few years ahead of time, etc. It follows then that, unless you foresee a need to sell in the next 5 years, the first rule of thumb is that you should go into a fixed rate mortgage for your owner-occupied property. This is especially true for those with more than 2 properties (which you may also want to look at locking down your interest costs for the property with the biggest outstanding loan). Five years is not a very short time and you never know when you might get an exceptionally good offer for your investment property and you might just want to cash out and take profit and redeploy your funds.

Now we are ready to look at the virtue of locking in fixed rates over prevailing market rates. The case for fixed rates will not be difficult to argue when you look at the current floating rates hovering in the range of 1.45% p.a. for the initial years. When you lock in a 3-year fixed rate home loan (currently in the range of 1.75%-1.88% p.a.) you are essentially paying just 30-40 basis points higher which will not translate to much difference in terms of monthly repayment. For example, without going into loan amortization but taking simple application of 40 basis points or 0.4% p.a., every $100,000 outstanding loan will increase by $400 per year or $33 per month (actual will be much lower at around $19 more per month using 25years and difference between 1.88% & 1.48%). Using a typical loan of $700,000, you are talking about a difference of about $200 increase in your monthly instalment which you will agree is insignificant when compared to interest rates rising above 2.5% p.a. eventually.

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This is the reason why at MortgageWise, we have been asking our clients to switch to 3-year fixed rate loan since October 2014 unless they have plans to sell their property within 3 years or they see a risk of being unable to refinance after 3 years when rates revert to higher levels. Our position is that as long as fixed rates stay below 2% p.a., or at half the historical average of 4% p.a. for Singapore’s 3-month sibor rate over the last 20 years, one will not err going into fixed rates.

The harder decision now is to choose between a 3-year fixed rate at average 1.88% p.a. or a higher rate above 2% p.a. for longer lock-in periods. Until another bank comes along with a 4-year or longer fixed rate home loan, that will be CIMB Bank. If this is your owner-occupied property, or one with the biggest outstanding loan, we think it makes a lot of sense to switch over to the latter – a 4-year fixed rate at simple average of 2% p.a. We even recommend the 5-year fixed at 2.28% p.a. !

We will only know on hindsight if this is the smartest move you can make at the start of 2015, when prevailing interest rates though rising are still at historically low levels unseen for a decade. We have already established the case for 3-year fixed rate earlier. And at simple average 2% p.a., this will be a no-brainer at about another 20 basis points more or 0.6% p.a. over prevailing floating rates, which again on a typical $700,000 loan is around $300 (overstated) more per month.

The only way to evaluate at this point is to postulate what would be the prevailing 3-month sibor and the corresponding 3-year fixed rate promo in the next few years. This is what we think would happen on a very conservative basis (assuming US Fed will err on the side of caution and go on only 25 basis points increase per year)

 3-Mth Sibor3-Mth Sibor+0.803-Yr Fixed Rate
Current0.681.481.88
2015 End1.001.802.20
2016 End1.252.052.50
2017 End1.502.302.70
2018 End1.752.553.00
2019 End2.002.803.20

In the scenario above, if you have locked in a 3-yr fixed rate today at 1.88% p.a., you would likely refinance to another fixed rate loan at the end of 2017 at 2.70% p.a. which will translate to an average of 2.20% p.a. (1.88×3+2.70×2 over 5 years). This would be quite comparable to CIMB’s 5-year fixed rate of 2.28% p.a. today. By the same token, the 4-year fixed rate will be 2.08% which makes CIMB’s 4-year fixed rate today at simple average of 2% attractive!

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This is the only way we can make some kind of calculated assessment on CIMB’s fixed rate loan. However bear in mind at MortgageWise, we believe the rate of interest rate increase should be more acute than the conservative example above. We believe when the recovery gains further traction in the US, and if Euro and China manage to turn the corners as well, there will be a momentum as the general feel-good factor and confidence feeds on itself.

In conclusion we believe the potential benefit of locking into CIMB’s 4-year and 5-year fixed rate package today far outweighs the risk.

 

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DBS Increase Spread For FHR Home Loans

Two weeks ago DBS has increased the spread of their FHR-pegged home loans across the board and re-introduced sibor-based packages to the market, something which they stopped with the launch of FHR about 6 months ago. DBS remains the first and only bank to have introduced this innovative feature.

What should one make of this latest move by DBS? First let us understand what is FHR. It stands for Fixed Deposit Home Rate which is basically the average of DBS’s prevailing 12-month and 24-month time deposits rate for the deposits band of S$1,000 to S$10,000. These two rates have remained constant ever since FHR was launched in Jun 2014 at 0.25% p.a. and 0.55% p.a. respectively leading to an average of 0.40% p.a. for FHR, whilst 3-month sibor has been on an uptrend since Nov 2014 from 0.42% all the way up to 0.67% in the span of 2 short months.

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At MortgageWise we have been recommending clients who were looking for floating rate mortgage to consider FHR-pegged loans as we think it is a superior and innovative peg for borrowers. Our reasoning is simple. FHR will eventually rise when banks in Singapore lift their deposit rates across the board, however we believe FHR increments will always lag behind sibor increases, and the reverse will happen when rates start trending down in the next down cycle.

First understand that the three local banks are net lenders in the Singapore interbank market, ie. they lend more than they borrow. You can appreciate this simply by looking at their vast retail network on the island and the huge base of depositors who parked money in savings and time deposit accounts with local banks. What this means is that for the banks to make more money, or increase their spread in banking lingo, they will try to lend higher in the interbank market and hold back raising their “costs of funds” for as long as they can, ie. deposit rates that they pay to attract you and me to park money with them. It makes commercial sense then that they will wait for sibor rates to trend up further, signaling liquidity drying up in the market, before increasing their deposit rates to attract more funds. In a way when sibor goes up, foreign banks will start to run more fixed deposit promotions (you see that happening already now) and raise funds through deposit base rather than relying solely on interbank borrowing. When that happens local banks will eventually be forced to raise their deposit rates as well in order to avoid exodus of funds. However there will be a time lag for them to do this for commercial reasons as explained earlier.

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In a reverse situation when the cycle turns and sibor rates start trending down, local banks will quickly lower their deposit rates in order to maintain the same spread or profit. Hence we predict FHR will drop much faster then sibor rates in an environment when rates start to fall for example due to another financial crisis. Borrowers will benefit immediately with reduction in FHR.

In conclusion we think FHR is indeed a better peg than sibor in both a rate hawkish as well as a rate dovish environment, and it retains the same transparent nature of a money market peg like sibor as opposed to bank’s internal board rate for mortgage loans.

We suspect DBS probably realized as much. So instead of raising their FHR which means raising their costs of funds immediately, they now increase the spread of their FHR-pegged loans to 1.05% for the initial 3 years, as well as the “thereafter” spread from year 4 onwards from the previous 1.25% to 1.45%. Even at this new spread, their FHR package rates remain highly competitive at only 1.45% p.a. and ranks top lowest for our floating rate comparison, as sibor has moved up even more over the same period. The bank has since re-introduced sibor packages to the market in a bid to diversify their loan portfolio away from FHR pegs, which reinforces our view that FHR is indeed a superior peg and first choice home loans for borrowers in the long term.

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Lastly, there is one caveat. Our argument above might not hold true if the 12-month and 24-month fixed deposits for the lowest deposits band of S$1,000-S$10,000 forms only a small percentage of the bank’s total deposits, which is likely the case going by Pareto’s 80/20 rule which suggests that 80% of the banks’ deposits probably come from 20% of the bank’s clients, the HNWI (high net-worth individual). Conversely although fixed deposits of $10,000 and below might form 80% of all the fixed deposit accounts, collectively they only contribute to 20% of the deposits which the bank can always choose to ignore and raise the deposit rates (hence FHR) in exchange for a much higher loan interest revenue from FHR-pegged home loans.

 

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.

 

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US Recovery At A Solid Pace

So we were proven right again to predict back in November last year that the full effects of the oil price plunge is going to trickle down to the economy in 6 months and we are only 3 months into it.  This same view is concurred by US Federal Reserve in its latest policy statement after a 2-day FOMC that “falling gasoline prices have boosted household purchasing power” and “it expects unusually low inflation to gradually pick up as the transitory effects of tumbling oil prices fade.”

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The Fed also upgraded its economic outlook citing strong job gains and the economy expanding at a solid pace.  Unemployment fell to a near normal rate of 5.6% now with 252,000 jobs added.  Overall whilst Fed acknowledges the easing of inflationary pressures due to lower energy costs, it believes the pace of inflation will pick up in the medium term as markets adjust to the new oil price levels and consumers pick up in spending again.  It re-iterated it “can be patient” while it assess the timing of the 1st “lift-off” in interest rates.  It also removed a reference in past statements about “keeping rates at near zero for a considerable time” which is a clear signal of its intention.

The way we see it, barring another mini-crisis with Greece exiting Euro which we think is not likely at this point, the 1st rate hike looks quite likely to be in June just before the start of summer spending as Janet Yellen further told reporters it will not happen until the next 2 FOMC meetings at the earliest.

With further strengthening of USD/SGD to 1.35 following the easing of MAS’s monetary policy in Singapore, we now believe 3-month sibor is set to cross 1% before the year is up.  This is somewhat higher than what most analysts forecast at the moment.

 

Over at MortgageWise we ask our clients now to consider locking down fixed rates of 3 years as soon as your lock-in period ends on your current loan, especially when fixed rates are still hovering below 2% p.a. for most banks.  At at this point, most of the banks in Singapore providing mortgage loans have shortened their fixed rate packages from 3-4 years down to 2 years.  Only 3 banks are still offering 3 year fixed rate home loans for refinancing or new purchase.  Talk to us today to find out more before market rates move up further!

 

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Fixed Rate Or Floating Rate?

The first month of the new year has seen a flurry of activities as banks in Singapore scurry to adjust, re-adjust, tweak and re-tweak new packages for fixed rate home loans as the market swamp to fix their mortgage rates.

Indeed you can expect the scare out there if sibor is to continue rising over the next few quarters the way it did in December, with 3-month sibor rising 40% from 0.45 to 0.65 currently, albeit it has stabilized a little. Most analysts predict that 3-month sibor will reach 1% by end of 2015. We think that it will go even higher. Follow our blog.

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If it hits 1% p.a. by Dec this year, most borrowers in Singapore would have to pay close to 2.25 %p.a. on their mortgage when their lock-in expires and typically their rates get adjusted upwards to a 1.25% spread from Year 4 onwards. Hence, refinancing is going to be theme going forward considering 80% of the home loan market is on floating rate sibor over the last 4-5 years.

The most common question we get now is should we fix the rate now or just hold back for a while longer?

To that question I always answered with a question. What is your outlook on interest rate going forward over the next few years? You need to decide on that first and take a position before you will know which home loan to choose.

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Generally the consensus is that with recovery in US market, rates are going to rise. The not-so-clear issue is how fast, or how much will it rise to and by when? For that one needs to gaze into the crystal ball for answers.

At MortgageWise, we say do not bother to even predict. At this moment, we are simply advising all our clients to go lock-in fixed rates as quickly as you can while it is still below 2% p.a., which though it has risen slightly from last year’s all-time low (around 1.38-1.42% p.a.), it is still at the lower end of the range historically. Currently fixed rates are hovering in the 1.5 to 1.88% pa. range depending on whether it’s a 2 year or 3 year fixed rate home loan.

It’s no-brainer for us. Why so? Simply look at the lowest floating rate package out there at the moment – DBS’s floating rate home loan is at FHR (Fixed Deposit HomeLoan Rate) +0.85% (Yr 1) and +0.95% (Yr 2) which comes to 1.25% p.a. in the 1st year, and 1.35% in the 2nd year. If you take a simple average that would be 1.3% p.a. over 2 years. What is the difference between 1.3% and the lowest fixed rate of simple average 1.4% currently offered by Bank of China? Insignificant. Let’s look at one example of a typical loan to illustrate my point :

Outstanding Loan                            = $700,000
Remaining Tenure                           = 27 years
At 1.3% monthly instalment          = $2,563
At 1.4% monthly instalment          = $2,596
Difference per month                      = $33
Difference over 24 month              = $792

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I am sure $800 is not a lot of difference to a lot of people. Which is exactly our point – why bother to save just $800 with floating rate, while the risk of getting your bet wrong and should sibor shoot up to over 2% in the next 2 years your savings would be many multiples of $800! Just go fixed and lock in your rates today while it is at 1.4-1.6% range. It does not make a lot of difference at all to your monthly repayment. In fact we recommend our clients to lock-in for 3 years even if it is at a higher rate – Maybank’s simple average of 1.75% over 3 years fixed :

Outstanding Loan                               = $700,000
Remaining Tenure                              = 27 years

DBS’s current floating rate package is at FHR+1.2 in the 3rd year (or 1.6%), hence simple average over 3 years = 1.40% p.a.
At 1.40% monthly instalment          = $2,596
At 1.75% monthly instalment          = $2,713
Difference per month                        = $117
Difference over 36 months               = $4,212

What this simply means is that by locking down a slightly higher fixed rate at simple average of 1.75%, you are taking a bet of $4212 that if rates move up beyond 1.75% + 0.35% or 2.1%, you would have saved on interest by moving to fixed rate now. 35 basis points is the premium you pay for fixed rate now vs the lowest floating rate average, ie. 1.75-1.40, hence also your breakeven.

So ask yourself how likely will rates move up to 2.1% and beyond and how soon? Already we are not very far away from this number.

Finally for those with substantial loans like above $1M, we bet that you will likely save even more if you lock-in a fixed rate home loan of 1.88% for up to 4 years by Stanchart, the only bank offering fixed rate package beyond 3 years right now. However you have to act fast, as this promotion ends 28 Jan 2015!

(Note : In this article we use simple average to calculate average interest over 2 or 3 years and we ignore the effect of interest amortization where you actually pay slightly more interest in the 1st year compared to 2nd year and so on, as this would make the calculations too complex for the purpose of this article.)

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Cheapest Home Loan Ever

As we start off a brand new year let me wish all my clients and readers who follow this blog a blessed year ahead and wish you every success in all your investments in 2015!  The most valuable wealth of course is health and I wish you overflowing amounts of that and remember to thank God and count our blessings.

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Towards the end of last year we witnessed a sudden plunge in oil prices from over USD100 to a little under USD60 now, which prompted us here at MortgageWise to start predicting a stronger than expected recovery in US back in Nov 2014.  This would in turn lead to interest rates rising earlier than expected likely sometime in Q2. We are still keeping this view and we think 2015 will be a good year where we see growth in US driving external demand (GDP grew 5% which is strongest ever in Q3 last year) which will lead to recovery in Eurozone, Japan and even helping China sluggish output in recent months. How much will rate goes up to in 2015?  As an indication US Fed has forecasted that the Federal Funds Rate will reach 1.1% by end of 2015.

The overarching theme for 2015, as far as mortgage planning and property investment is concerned, will undoubtedly be that of consolidation and getting ready for rate hikes.  To this end, we will be sharing more insights as the year progresses but at the start now we like to highlight the following :

(A) Lock-In Fixed Rates At Historical Low Levels Now – Last Chance

Yes this could be your last chance to lock-in the cheapest home loan ever in a 3 year fixed rate package at an average of only 1.42% p.a. Most of the banks have already revised their fixed rate up in the last quarter of 2014.  Maybank is the only one left with rates unchanged at such low levels which will be a thing of the past soon once global economy picks up steam.  They will pull the plug on this very soon and you need to act fast.

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In fact we are expecting all the mortgage banks to review their packages and launch new pricing for 2015 very shortly one after another in January.  And no prize for guessing which way interest rates will move.  The market has already factored in impending rate hikes this year with 3-month sibor rising by almost 50 basis points to 0.45 in the span of 3 months, and sor has fluctuated widely with the strengthening USD.

(B) Take Stock – Know Your TDSR

We notice that most people still have a vague idea of Total Debt Servicing Ratio (even though it was rolled out some 1½ years ago), what are the implications and how do you compute this ratio.  So we have actually come out with a simple TDSR Calculator on Excel Spreadsheet for all our clients.  Just drop us a request on this website and we will gladly email it to you.

The TDSR calculator is a very useful tool as you can easily punch in all your personal income and debt information without revealing them to anyone.  It gives you an indication of your actual TDSR ratio and the bank will use the same methodology in assessing your application.  And you can keep the information in soft copy and update it regularly for your next mortgage refinancing without punching in all the information again on some online calculator.

(C) Two More Years to Refinance Investment Property

We started talking about this “grace period” last year when we advised clients with more than 3-4 properties to take a serious look at their real estate portfolios and they may want to sell down one or two investment units in order to bring their TDSR within the stipulated 60% ratio.

The grace period given by MAS ends 30 Jun 2017 after which borrowers who still do not meet TDSR will not be allowed to refinance their mortgages, except for the property which they live in.  Some may need to move into such units in order to get exemption from TDSR.

Sign up to our newsletters to receive blurps on interest rate movements and analysis for better mortgage planning. Speak to our experienced mortgage brokers today who can assist you with the right roadmap and decision for refinancing of your existing home loans.

 

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Last Chance To Profit From Historical Low Interest

Cash Out On Higher Valuation With Historical Low Interest

With the impending rise in interest over the next few years once US Central Bank starts hiking rates from 2015, it presents a rare opportunity for those who are no longer under any lock-in period on their existing loan to profit.  Let me explain.

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At the moment there is still one last bank in the market (all the rest have adjusted their rates up) that offers a 3-year mortgage fixed rate package at an all-time lowest interest of average 1.42% p.a.in the first 3 years.  Now with upwards bias on interest outlook, Singapore Dollar Fixed Deposit rates have started to trend up in the last couple of months with the highest rate at 1.55% for a 24-month placement from one foreign bank.  Which means if you can still do a cash out (take additional term loan on top of your outstanding housing loan at the same mortgage interest) on your property loan, after all most of us have been diligently paying down our mortgage over the years, even if you do nothing with the extra cash and just place it as fixed deposits, you will profit at a minimum margin of 1.55% minus 1.42% or 13 basis points.  Assuming a cash out of $300,000, this works out to be $400 p.a. or $1200 over 3 years.

It is unlikely any one of us will be excited enough over a $1200 profit to make all the effort to do a cash out.  Fair statement.  However remember I am giving the baseline profit here. Your “cost of funds” is already locked in at 1.42% per year over the next 3 years.  Interest rate will only rise against the backdrop of an improving economy, better corporate earnings which should translate into higher wages, more spending and investment into stock markets, etc. Stand ready to profit from the stock market bulls as Dow heads into the new year looking to hit the all-time record of 18,000 level!

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To capitalize on this recovery, where else can you find such a cheap source of funds where you can lock-in the interest.  There can only be upside.

However before you take action on this strategy, do remember 2 things :

1. You will need to service the higher monthly instalment in the next three years

Another good thing about locking in your interest at such a low rate of 1.42% is that for each dollar that you pay the bank every month, only 1/3 goes to the bank’s pocket as interest and 2/3 comes back to you in the form of principle reduction. Essentially you are paying yourself. Better yet if your rent can cover fully this monthly instalment albeit rental market in Singapore is projected to go even softer.

Say if you have bought your investment property 5 years ago and you have taken up a loan of $600,000 back then and your current outstanding loan is at $514,000 with the property now valued at $1.1M, you can take out the maximum of 70-80% of the valuation (LTV) less outstanding loan and total CPF used to-date, provided you met TDSR as a pre-requisite.

Using 70% as an example, this means you can cash out as an equityterm loan on your property :

70% of $1.1M – $514,000 – $0 (assume no CPF used) = $256,000

Your total loan outstanding goes up to $770,000 with $256,000 in the form of term loan at the same interest as your mortgage.  At an interest of 1.42% p.a. your monthly repayment goes up from $2048 to $2921.  You will need to be able to service this higher instalment which is fixed in the next 3 years.

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2. What goes up will come down, thread very carefully

It will be irresponsible of me to ask people to cash out on their mortgage without highlighting the risks involved, especially those who are investing into stocks and shares which we know are highly volatile.

There are 2 major risks here – first at the end of 3 years your fixed mortgage rate expires and if you are unable to refinance to an acceptable rate, you will need to get back your capital to pay off at least the term loan portion of your mortgage in order to square off your position.  Should the stock market plunge (no one predict the market 100% ) you will stuck!  Second, should the stock market plunge be accompanied by a property market crash, some banks might start to call for top ups on loan margins when market valuations drop drastically.

Due to the risks involved, I would seriously encourage you to look at real estate investment trusts (REITs) rather than just pure stocks with your capital.  As these vehicles pay out dividends or DPU quarterly which can range from 5% to 8% p.a. they form a better defensive play in getting you higher return from both yield (eg. 5% minus 1.42% or 3.58% p.a.) as well as capital appreciation.  There are still risks associated inherently with REITs like higher interest costs, drop in asset valuation, drop in rental income, etc. but it is comforting to know none of the REITs in Singapore suspended DPU payout during the Great Recession.

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Invest wisely which I think some of you know much more than me.  I am just reminding you where is a potentially cheap source of funds at your disposal.  Speak to experienced mortgage brokers today on how to get the best cash out package from the banks and to this end our team here at MortgageWise is ready to assist.

Do not forget to sign up to our newsletters to receive blurps on interest rate movements and analysis for better mortgage planning.

 

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