Now we go to step 3 in the 5-step process by looking at any special unique features offered by the bank.
Once again to recap the 5 steps for choosing a home loan are:
- Interest Rate
- Loan Restrictions (eg. lock-in period, prepayment penalty etc.)
- Special Features (eg. interest offset account, switching between sibor periods etc)?
- Personal Considerations
- Tenure and Loan-to-Value (LTV)
Besides the interest rate, banks do offer various interesting features in Singapore to entice customers to sign up with their loan package, some of these are intrinsic to the loan itself, others some kind of bundling with other products and services with the bank. Let us take a look at some of the more meaningful ones we think you might like to consider on top of interest rates.
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Before we go on, do note that the information given here may have changed or become obsolete by the time you read this blog post. Bank packages and loan features are subject to review and change sometimes products are canned. The information is accurate at time of writing this post which is in September 2014.
(a) Interest Offset Account
Not all banks offer this. DBS used to offer it but has since stopped. The only bank marketing this as a selling point at the moment is Stanchart, called MortgageOne account, but it is only available for private property loans, not applicable to HDB.
The concept is simple. The bank will pay you the same interest rate as your mortgage rate, on two-thirds of the deposits that you park in this MortgageOne account, capped at your outstanding mortgage loan. The deposit interests earned will automatically be used to offset against the interest on your mortgage loan with any excess going towards reducing your principle.
To illustrate with an example above, for someone who choose to loan $600,000 even though he has cash savings on hand of half of this amount $300,000, after interest offset the total mortgage interest costs is reduced by 35%!
Technically what this also means is that suppose you have $750,000 cash to invest in a small studio apartment in a new launch condo, instead of paying down using your own cash, you could just put down 20% deposit or $150,000 and park the rest of $600,000 in a MortgageOne account and the use the loan of $600,000 to pay progressively over time. As the bank pays you the same interest rate as your loan for up to 2/3 of your deposits, you are effectively borrowing and paying interest on $200,000 (1/3).
This feature is good for those who values liquidity and wish to park his funds while waiting for the right investment opportunity to show up like the next market crash! It is also useful for those making major career changes in life and wish to apply for the maximum loan possible while still having drawing a high income but with no use for such big loan yet.
Other banks do offer similar feature as Stanchart’s MortgageOne but the loan may come at a higher interest rate than their normal packages which will not be wise.
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(b) Priority Banking
If you are a private banking customer your bank will likely offer you some special mortgage rates provided they have consumer banking business in Singapore. Otherwise you may also want to consider joining Priority Banking (PB) of some banks who offer preferential mortgage interest rate to their PB customers. One good example here is ANZ in Singapore which currently offers a 10 basis point advantage to their PB customers over their public rate of Combo (ave of 3-month sibor and sor) + 1.05%. PB customers’ spread is 0.95% instead of 1.05%.
Incidentally it makes a lot of sense to park some of your funds in foreign banks like ANZ, Maybank, CIMB, etc. which have consistently paid out much higher time deposit rates compared to local banks. This is because foreign banks, with fewer branches and limited access to market, need to attract more “sticky” deposits for their funding needs instead of just relying on interbank money market.
If you also work in financial district or CBD area one added perk here will be the exclusive use of PB lounges during lunch hour coffee breaks.
(c) Free Switching Of Sibor Period
There is only one bank, Citibank, which offers customers unlimited and free switching between the various sibor interest periods from 1, 3, 6, 12 months anytime during the term of the loan. How is this important feature for some?
The interest period simply means how often your loan interest is set or determined. Though the sibor rates fluctuates daily in the interbank market, if you are on say 3-month sibor, once your rate is set it will be valid for the next 3 months before it gets reset again, notwithstanding daily fluctuations in the 3-month sibor rate.
In the interbank market, the 1-month sibor rate is always lower than 3-month which is lower than 6-month and so on. It always costs more to lend to someone for a longer period just like the bank will have to pay you a higher rate when you “lend” to them your funds for a 12-month fixed deposits as opposed to a 3-month.
Due to this incremental spread in interests, it will seem logical for one to always opt for the shortest period of 1-month sibor as at any one point in time this will be the lowest rate. The tradeoff is your rate gets reset every month instead of say every 3-month which means it becomes more elastic or responsive to any interest rate movements. We think that in event of an interest rate hike over time, the net effect will be more or less the same as although your 3-month sibor is “fixed” for next 3 month, it will be reset or adjusted more in the next cycle.
Maybe the only slight advantage free switching between interest periods offers is that in event interest rate goes up too quickly in short span of time, one can opt to switch from a 1-month to 12-month sibor (slightly higher by 20 basis point) and hence “lock in” the interest rate for the next 1 year like a fixed rate loan.
(d) POSB 8-Yr CPF Cap For HDB Loans
Available only for HDB mortgages, POSB has been aggressively marketing this special “hybrid” product where it is fundamentally a floating rate package at FHR (Fixed Deposit Home Loan Rate) currently at around 0.40% plus a spread of 1.48% which comes to 1.88%p.a. This spread is high compared to most banks’ promotional interest rate spread of 0.85-1.05% and even the longer term spread of usually 1.25% after 3 years.
The attractiveness of this loan lies in its “fixed” component where it caps the interest rate at the CPF ordinary account rate currently at 2.5% p.a. up to the first 8 years of the loan which is a long time. And that is quite a safeguard against spiralling interbank rates as CPF rate is known to be stable and inelastic to market. The Singapore government will not want to raise this rate frivolously as it means raising their costs of funds.
This feature is good for those who do not mind paying a slightly higher rate than market (by 50 basis points when compared to floating rate promotions now at around 1.2-1.3% p.a.) in return for that peace of mind. The final rate at 1.88% p.a. is still lower than the current fixed rate package of 2.18% p.a. with the longest fixed rate period of 5 years. In a way this is like a middle-of-the-road option between fixed and floating.
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(e) DBS Multiplier Account
Lastly in recent years banks have started to bundle their products together to increase the “stickiness” of customers to the bank. DBS is the first to start offering is in the form of a DBS Multiplier Account – an account that pays you above deposit interest that is way above market for up to first $50,000. This interest can range from 0.98% t0 2.08% p.a. and is determined based on the “monthly cash flow”, a measure on how much business or activity you do with the bank, comprising the sum of four components – monthly salary credited into a DBS/POSB account, total monthly spend on the banks’ credit cards, monthly mortgage instalment with the bank, and total monthly investment dividends going into a DBS/POSB account.
Besides DBS, OCBC is the next and only other bank at the moment to offer such an account which pays much higher interest (up to 3%) based on total relationship with the bank called the 360 account. However for OCBC the cash flow measures are slightly different and mortgage instalment is not one of them.
For those with existing relationship with DBS and would like to earn higher deposits interest on their spare cash, provided DBS mortgage interest rate is not too far away from the next best in the market, it does make some sense to consolidate your business to DBS, or any bank that comes up with product bundling strategy later on.
Consider using the free service of an experienced, knowledgeable & professional mortgage broker, like us here at MortgageWise, who not only help to plan with you on your new purchase, but become your mortgage partner in refinancing solutions over the entire term of your loan, giving you timely reminders and advice on the best home loan from time to time.
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