DBS ATM machines

Banks Start Moving Up FDR

We are spot on again at MortgageWise when we predicted end of last year (14 Dec) that we believe with impending rise in SIBOR local banks would start to move on their FDR loan pegs by Q1 2018, and it could come as early as January 2018.

We are close enough by one day. Just this past week on 1 Feb, DBS raised its deposit rate for 18-month Singapore dollar fixed deposit rate from 0.60% to 0.80% (as verified on its website). Meanwhile the deposit rate for FHR tranches 12-month, 24-month, 9-month and 8-month remains at the same level of 0.35%, 1.00%, 0.25% and 0.20% respectively. What this means is that those with DBS home loans pegged to the popular FHR18 loan peg signed between October 2015 and March 2017 would now see their mortgage interest go up by 0.20% and they should be receiving the notification from the bank shortly.

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Does that mean FDR home loans are no longer desirable? And what about all the other banks with FDR home loans would they be moving up soon?

Now we have to put this in perspective. Besides DBS, the rest of players with FDR home loans would most likely follow suit with some kind of hike, especially when the yield on US 10-year Treasuries has shot past 2.80% level, a high not seen since end of 2013 and for most parts before 2011 or the financial crisis of 2009. Three-month SIBOR (Singapore Interbank Offer Rate) has shot up a massive 25 basis points towards end of 2017 but has since retreated somewhat to 1.18% as at last week. However, against such an economic backdrop it is unlikely to stay suppressed for too long and the banks, being privy to movements in the interbank market, may have likely detected some upward pressure.

To be fair to lenders, the last raise in FDR rate was all the way back in Dec 2015 which makes it a full two-year period in which no lenders have moved on FDR home loan peg even though SIBOR has climbed steadily during this time from 0.62% at one stage and doubling to the current 1.18% as you can see from the graph below (which incidentally tracks the correlation between US funds rate and SIBOR over a period of 30 years). During this time, US Fed has also further hiked the federal funds rate four more times (Dec 2016, Mar 2017, Sep 2017, Dec 2017) since that historical first rate hike in a decade back in Dec 2015, moving it from almost 0.25-0.50% to a range of between 1.25-1.50%, or a full 1% hike over approximately two-year period.

graph showing interest rate correlation us and singapore

At MortgageWise, the basis of our recommendation over the last few years has always been and remains largely unchanged to-date – even though FDR (fixed deposit rate) home loan pegs are controlled by lenders just like BOARD rate in the past, its transparent and highly-visible nature means lenders will need to deliberate carefully before each increase. This is in stark contrast to BOARD rate, which no one really knows when the bank has raised, by how much, and how large a portfolio of loan accounts has been affected.

And we have also argued that in theory, the pace of increase in FDR will lag behind that of SIBOR, which will always be the first to respond to any change in money market forces, both upwards and downwards. This is because conceptually banks should only move up on deposit rates when liquidity becomes tighter and cost of fund rises. As long as it happens in that sequence, FDR will remain a better choice as a mortgage peg than SIBOR when interest rate cycle is going up – the reverse is true when that cycles turns.

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And we are glad to report so far it has proven to be so with banks only adjusting FDR once over a two-year period and by a mere 0.20% here when SIBOR has increased by a much larger magnitude of 0.60% to 1.00%.

Would the other banks follow DBS’s move to hike their respective FDR tranches? The question is not will they but how soon and by how much. And this is exactly what we will be tracking here at MortgageWise for our valued clients. Just ask our mortgage consultant for our FDR movements tracking chart over the last 3-5 years.

We hope to provide all the information you need to make the most informed decision, first between fixed and floating rate taking into consideration your situation (loan size and if the costs of switching banks make sense or not) and your objective (looking to sell? Or pay down?). Next, we hope to aid you in deciding which banks’ packages, loan pegs, and even which FDR tranche makes the most sense as they do not all rise in tandem as you can see here in the lastest example.

Incidentally with fixed rates still this close to prevailing floating rate, it makes perfect sense to quickly lock down 2-year fixed at 1.65% and 3-year fixed from 1.70% (first year). And we have made this call repeatedly so often until we are sounding like a broken record. We just do not know when lenders will start to adjust their fixed rate up, but some already did in the last few weeks. So for the best home loan Singapore rates, speak to our consultants quickly!

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.

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