In recent months, one by one, lenders who offered FDR (fixed deposit rate) home loan pegs in the market started to pull the plug on this all important mortgage peg and replaced them with the traditional BOARD rates, even though some give it a new name like MR (mortgage rate). One bank even go as far as to replace loans on its existing books from FDR to the new BOARD, hence migrating them in batches over time to phase out FDR completely at some point we gather.
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Is this a good development for the mortgage industry in Singapore? We think not.
As much as we are paid by lenders for distributing mortgage products in Singapore, we do have a duty to report developments in the industry from rate hikes by individual banks to significant strategy changes like replacement of mortgage pegs. Hence, we need to voice our conerns here independently as a thought leader in the industry and we do have something to say about this recent development which we see as a step backward.
I believe the biggest beneficiaries from this will be the three remaining banks, still with FDR home loans firmly in offering for their clients be it for new loans or renewals, namely DBS, StanChart and HSBC. Why do I say that? There are two reasons and I let me explain shortly. First it is noteworthy for me to point out that DBS, which pioneered the whole concept of pegging mortgage interest rate to deposit rates back in 2014 (probably a first in the world), has remained the most steadfast and consistent in terms of its mortgage strategy and execution which bodes well for shareholders of the bank.
The Withdrawal Proves Its Usefulness
We have long said in this blog that the cost structures and funding strategies of the banks are all different and there is no point speculating whether longer tenure FDR tranche will go up more often or less often than shorter tenure tranches. Some banks will find it harder to manage FDR than others, ie. the cost implications for raising deposit rates is more real for some than others. With the recent moves, apparently what we said is true as some banks decided to call it quits for FDR loans.
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However, the irony is this – the very fact that some lenders are finding it difficult to maintain or hike FDR without hitting their costs proves what we have been advocating all this while is correct, that FDR makes for a better mortgage peg than SIBOR or BOARD, when interest cycle is going up.
We do not fully comprehend what is going on behind the scenes for the withdrawal of FDR mortgage peg. Perhaps there is a change in the banks’ mortgage strategy, with the recent run-up in SIBOR. Or there are some changes in the management team which brings new direction. No matter what cause the withdrawal, what is certain is that the market will now perceive FDR to be the preferred mortgage peg even more so than before. Which leads me to my next point.
Those Who Want FDR Will Have To Refinance Out
Those who were on FDR home loans previously and who now like to stay put on the same mortgage peg on renewals would be forced to look elsewhere as their existing banks no longer offer the peg. Unless they choose fixed rates for repricing, otherwise they would most likely be given the option of switching over to either a SIBOR-based or BOARD-based home loan package.
And instead of total 6 lenders offering FDR in the past, we are now down to half this number who might get bulk of the business going forward.
Of course, this is only our opinion and we could be wrong in our assessment. We also need to put a caveat here – how the individual banks manange their various FDR increases over time will say a lot about who is more dependable as a lender who maintains a fair rate hike policy that is commensurate with the overall increase in market interest rate. We know of clients who were upset with recent increases in FDR from one bank that come right on the heels of a hike barely just 4 months earlier.
So, it does not always mean that choosing FDR would triumph over BOARD – making sure you pick the right FDR tranche with the right lender is more important. To this end, it makes perfect sense to use the service of a professional mortgage consultant who tracks the all the changes in the mortgage market closely. Speak to our consultants now.
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Still by and large, for floating rate packages we would still argue for FDR over BOARD or SIBOR for the simple fact that it has proven to be less volatile so far and lenders have largely waited considerable time lags before announcing any unpopular hikes. For this reason, we hope lenders would bring back FDR home loans at some point when they sense that it can be a viable mortgage tool that works for both homeowners as well as lenders themselves. Afterall, if you think about it deeply, FDR can really work just like a BOARD rate which morphs into multiple tranches over time. For example, lenders can break FDR into 50 tranches from 1-month to 50-month fixed deposit to carry the idea to the extreme. Not every tranche of fixed deposit is going to cost the bank in the same way when they choose to hike it.
The real difference from our perspective is that, as all FDR rates are published publicly on the bank’s website, FDR increases are more visible and hence under greater scrutiny than increases in BOARD rates which are less transparent. But isn’t that the fundamental reason why the market would prefer FDR over BOARD in the first place? And also why we would still recommend FDR as the way forward for homeowners in Singapore.
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. See their testimonials.