SCB Bank Mortgages

StanChart Introduced 36FDR

Just last week, StanChart introduced their 3rd tranche of FDR home loans on 25 May 2018, where all mortgages will now be pegged to the fixed deposit rate of 36-month set at 0.72%, instead of the previous 9-month which will stop by end of May.

This would be the lastest FDR tranche in the market, and comes about 6 months after SCB came out with 9FDR back in Dec 2017.  The time taken to “fill up” a new tranche of FDR seems to be getting shorter.  This duration for a new tranche of FDR to be offered may be different for local versus foreign banks due to the different cost structures.  For local banks, we have observed a new FDR tranche can be offered up to one-and-a-half years typically but we do expect this to be shortened as interest rises.

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There are some arguments we heard that longer-tenure FDR like 36-month would make a wiser choice than shorter ones like 8-month, because the absolute value of the peg is higher hence the spread (or the mark-up above the peg) on the loan would be reduced.  Still, I do not quite fathom this as technically-speaking for FDR home loans, that is not the real spread for the bank which is the actual interest rate charged to borrowers less out the average cost of funds for the lenders.  The real “blended” cost of funds across all funding sources be it deposits or interbank is unknown.  For the three local banks, we can only gauge the growth in interest margin from their quarterly financial results which we do track in this blog.

If 36-month FDR is preferred for their higher peg value, then how does one justify that SCB’s new 36FDR has a value of 0.72% whereas Maybank’s 36FDR has a value doubled that at 1.40%?  There is no point speculating how one bank would manage their FDR versus another and which bank would move up their FDR first.  Rather, what is more certain is this – the bank that just introduces a new tranche of FDR is less likely to want to incur the wrath of its new customers by hiking it so soon.  And it is for this reason that we would recommend SCB’s 36FDR for those looking at floating rate mortgages.  Also, based on historical trends, the bank has further shared that the highest that 36FDR went up to was 0.95% back in Oct 2010 and lowest at 0.42% in Sep 2011.  It is currently at 0.72%.

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However, there is something peculiar about mortgage interest rates in the Singapore market at the moment.  As banks have moved up their floating rates slowly over the last few months, the gap between floating and fixed is now at its narrowest.  In fact, with at least one bank still offering 2-year fixed rate at 1.75% for private property loan amounts above $500,000, the gap is just within 10 basis points! (lowest floating rate for completed properties is now at 1.65%).

Speak to our consultants today as this could be the best time to review your home loan with our Zero-Cost Refinancing benefit for all MortgageWise clients, terms and conditions apply.  Those with no lock-in or with lock-in expiry within the next 6 months, take action now!

 

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.

 

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Singapore Banks Home Loan

Foreign Vs Local Banks

Singapore is an open economy that embraces free trade and open competition which helps to drive up productivity and bring down prices.  For that I always like to quote the airlines and telcos to see what has happened to prices in the last 10 years.  Monopoly or oligopoly is never a good thing for consumers, except when it comes to certain goods and services of a social or national nature, or where there are high fixed infrastructural costs in the industry

In an earlier article I have estimated the three local banks combined command a market share of 83% of the mortgage pie in Singapore.  Is this a good thing?

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There are various views.  Ceteris paribus, the preference in the Singapore market is to go with a local bank for mortgages where most would have some sort of banking relationship like salary-crediting account, GIRO or transaction account, etc.  For this reason, it is natural to expect the lion’s share of the market to go to the three local banks.  Still I cannot help but feel a more “balanced” allocation would be to move towards a 70:30 market share split between local and foreign lenders, for the longer term interests of you and me as a homeowner or borrower, instead of the current 83:17 split.  This is because competition amongst the 3 local lenders is fierce and often lead to homogeneity of their offerings.  This is especially true for BUC home loans for new launches.  In the end, consumers do not really get much of a choice.

In recent years we have also seen a new breed of home loans pegged to deposit rates, or what we termed as DMR (deposit mortgage rate) home loans for simplicity sake, that has gained popularity.  It is a laudable innovation, first introduced by DBS back in 2014, which essentially acts like a “middle-ground” option for those who find traditional SIBOR-pegged mortgages too volatile and too elastic to interest rate hikes, but who find fixed rate home loans too high a premium to pay especially for bigger loans.  DMR has indeed been the main driver for market share for local banks in recent years that has resulted in tremendous growth of their loan books at the expense of foreign lenders.

However, of late we notice some pushbacks by foreign banks with the introduction their own DMR home loans first by StanChart last year, followed by Maybank last month.  More may soon follow.  In another positive sign for the market, we also notice more foreign banks now willing to do business at slimmer margins by introducing 2-year fixed rate packages at interest rate that can give local banks a run for their money.  This is a smart move as I have elaborated in an earlier article – the only way for foreign banks to compete is not to go for margin but volume by deploying the right distribution channel.  To run fixed rate promotions, banks need to lock-in a tranche of funds back-to-back from their Treasuries and that requires them being able to first secure funds at a certain COF (cost of funds), hence it is sporadic in nature for foreign banks who are net borrowers from interbank market.

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This is unlike local banks who command the biggest share of Sing dollar deposits by way of their branch operations, salary-crediting accounts, etc.  They are likely net lenders in the interbank market.  The foreign banks will never be able to match the low cost base of their local adversaries who can plan ahead their Treasures operations and provide perennial fixed rate packages throughout the year.  However local banks do also run up huge operating fixed costs in an enlarged mortgage and credit departments so it is very hard to say who has a more profitable business model. The smart lenders are the ones who recognize the shifting patterns of consumers preferring to go through independent third-party mortgage distributors or brokers, over mortgage specialists from the banks, as a better way of planning for mortgage; and hence converting their fixed costs to variable by keeping internal teams small and lean and leverage on external distribution networks.  More and more so, bankers are becoming loan processors rather than advisors no matter what name you give them.  It is an inevitable trend that is set to take roots as homeowners prefer and trust a relationship-based advisory over that of a transaction-based one that has no accountability after the deal is done.

Are we then advocating for foreign banks? Absolutely not.  We are advocating let there be free market competition from more lenders be it local or foreign which will lead to the best available rates for homeowners instead of “standardized interest rates”.  Do not forget there are still finance companies in Singapore considered local but who are not as active in this space.  We hope over the long term there will be more industry participants who recognize the attractiveness of the mortgage lending business in Singapore with stability of returns, low default rate, well-regulated regime with TDSR, and the continued appeal of property as an investment class from the rising Affluent segment.

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For this free and vibrant marketplace for mortgages to come true, consumers will also need to stay open to all lenders be it local or foreign and be willing to “try out” new lenders.  After all you are now putting money but borrowing from the banks.  Back in May 2015, we already have our Central Bank conferring the status of “D-Sibs” (Domestic Systematically Important Banks) on seven banks (3 local and 4 foreign) and imposing stricter requirements and supervision on them, for example they need to meet the requirement of 10% Capital Adequacy Ratio (CAR) which is higher than the 8% stipulated under the latest Basel III international standards.  The four foreign banks are Maybank, StanChart, Citibank and HSBC.  As these banks have significant retail operations in Singapore, they are required to locally-incorporate their Singapore operations which then comes fully under the Company Act.  In short, you are dealing with a Singapore-incorporated bank even though it remains fully-owned subsidiary of its international parent bank.  Outside of these seven D-sibs, you also have some other major banks with growing retail presence here in recent years the likes of Bank of China (BOC), CIMB etc.  Notably BOC has been particularly consistent and aggressive in their fixed rate mortgage strategy which has brought much delight to those in the market looking for good fixed rate loans.  If these banks expand their footprints further in Singapore over the next few years, they might also be become D-Sibs at some point.

The real winner is you the consumer.  It will be a matter of time before all 7 D-Sibs (and we hope more to come) offer DMR home loans as well as the traditional SIBOR-based loans and fixed rate packages.  Whoever secures the lowest funding costs from time to time and is most hungry for your business will entice you with the lowest remortgaging rate be it for fixed or floating. Do your comparison and make sure you always get the lowest funding cost for yourself and the best way to do that is to work with a professional mortgage intermediary like us as many of our clients can testify to.  In fact sometimes we give lenders so much business that we gain an unfair advantage if you like – with exclusive deals offered below-the-line sometimes.  So speak to us today to find out more!

 

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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Fed Hikes Third Time In 15 Months

In a widely-anticipated move by the market in recent weeks, US Federal Reserve hikes its federal funds rate to a range between 0.75% and 1.0% following its latest FOMC (Federal Open Market Committee) meeting this month.  This amounts to a total hike of 75 basis points over the last 15 months since that historical first rate hike in a decade back in December 2015 when the funds rate hovered below 0.25% range.

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In fact, it is noteworthy that in the run-up to March FOMC, various Fed officials including Janet Yellen and her vice-chair have propped up the market’s expectation for a hike this month by their more hawkish tone, leading to rising odds of a rate hike from a low 30% at beginning of the year to almost 90% in the final week, going by the fed funds future.

Although this is likely a result of a surprisingly strong jobs market data in the first two months of 2017, aided by an unusually warmer winter this year, I read this maneuvering by US Fed as a “pre-emptive” strike.  We have earlier given our forecast for the year of two rate hikes in 2017, probably in the 2nd half of the year taking our 3-month SIBOR here to a range near 1.50% by December.  Our view is that Fed needs to hike quickly in order to give itself leverage to reverse its course should economic growth stalled along the way.  The slightly warmer winter in Northern hemisphere come somewhat unexpected this year leading to strong enough jobs numbers for Fed to make this pre-emptive move.  Hence its propaganda to “talk up” the market for a rate hike before the FOMC.

Having done so, I now expect that Fed to leave the benchmark rate unchanged for a while for the next six months as it needs more evidence on the health of the American economy and more importantly they are looking for “hard evidence”, in Janet Yellen’s words, of fiscal stimulus measures from the Trump administration.  I expect to see more details on that only in the 2nd half of the year.  So with a “pre-emptive” strike already in place so that the Fed is “not too far behind the curve”, we predict the next rate hike for funds rate to go above 1% to be in September FOMC.  Looks like we may still be on track for our prediction of two hikes in 2017 though we were caught out by this pre-emptive move in the 1st half of the year.

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Here’s a summary of the key announcements from March FOMC:

  • Fed forecasts another two more rate hikes this year, keeping to its forecast of 3 hikes in each of 2017, 2018 and 2019 until the funds rate hit its long-run level of 3%.
  • They maintain GDP growth to be at 2.1% for 2017 but raise that slightly from the previous 2% to 2.1% for 2018.
  • Unemployment rate will fall from the current 4.7% to 4.5% by end of the year and stay at that level (full employment) till 2019.
  • Fed acknowledged inflation has strengthened in recent quarters. Headline inflation, at 1.9%, is now near Fed’s target of 2%, albeit its preferred measure of core inflation which strips out food and volatile energy costs is still at 1.7%.  Fed expects the still-low interest rate environment to support core inflation in a slow rise to its target of 2% and stay at that level.
  • It also noted a firmer business investment and household spending continuing to rise moderately.

On the whole it is an encouraging picture on the health of the US economy against a backdrop of a gradually-stabilizing global economy with fading risks of Chinese market stagnation, Brexit shock, oil price crash etc.  Still we think there are destabilizing events for 2017 that will determine if we do have that final and third rate hike for 2017 in Dec FOMC.

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Coming back to Singapore, what is the implication for homeowners and investors?

First all eyes will be on the benchmark interest rate of 3-month SIBOR and how fast will that rise up as it has a close correlation with the fed funds rate.  When SIBOR rises, you can expect banks here to raise all prevailing mortgage loan pegs at some point be it BOARD or even DMR (deposit mortgage rate) which has commanded lion’s share of the mortgage market in the last 3 years now that five banks have launched their own DMR mortgages.  To profit from such DMR loans, lenders will definitely need to raise their DMR in tandem with a rising SIBOR, in order to increase their NIM (net interest income).  The question is will they all rise at the same time or by the same amount?  That is what we will be watching and tracking closely here at MortgageWise, where you get timely reminders as our client.

We had expected local banks to respond within weeks of the last rate hike in December last year.  That did not happen. We see that as a good thing which also proved our point that lenders will be very wary of making any hikes on DMR which is a singular and very transparent loan peg unlike BOARD, notwithstanding both being controlled by lenders.  Banks need to calibrate their moves very carefully to avoid potential backlash from existing clientele base.  However with this 2nd rate hike by US Fed in the space of 3 months, we now expect some banks to finally make their move on deposit rates possibly within a month or latest before the end of Q2?  Particularly so if SIBOR creeps up further from its current levels.  Another reason for that – any further delay will leave them with less than half the financial year to reap the benefits of a higher interest margin.

With our forecast of two rate hikes in US in 2017 (which by the way is less aggressive than US Fed’s), we are expecting one hike in local DMR rates, bearing in mind the price competition amongst lenders for market share.  And we think SIBOR will stabilised after rising slightly this year; the path is still going to be gentle.  But with fixed rate mortgages now still hovering below 2%, it may be a good time to review your current mortgage interest, especially if you are out of any lock-in period.

Speak to our consultants today who will share with you more on our insights and analysis.

 

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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Home Loan Best Deal

Ridiculous Interest At 0.60% p.a.!

Not do not get too excited yet as this is only for Building-Under-Construction (BUC) properties like new launches and apply only during the construction period.

Over the weekend, DBS fired the first salvo to target new launches mortgage this year by launching a limited edition of its popular FHR18 + 0% interest package up to the first 4 years or when the project obtains its T.O.P. (Temporary Occupation Permit) whichever is earlier.  FHR18 is currently at 0.60% which means the effective interest rate during the construction phase will be 0.60%!  After T.O.P., the interest reverts back to a more familiar rate of FHR18 + 1.0% or 1.60% currently.  The DBS promotion is limited by period and those who are keen need to apply by 6 March and accept the loan offer by 10 March.  Obviously the bank has the few upcoming and prominent new launches in mind from Clement Canopy, Grandeur Park and perhaps even Park Place Residences and/or Seaside Residences, albeit the package is made available to all BUC properties in Singapore.

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UOB responded by launching a similar package on its own DMR (deposit mortgage rate) called 36FDPR that has a slightly higher rate at 36FDPR (0.65%) + 0% or 0.65% during the construction phase, but which comes with no requirement for one to purchase a mortgage insurance.  DBS may waive off this requirement otherwise when one factors in the insurance premium costs on the DBS package, the two packages might work out to be more or less the same in terms of cost.  Speak to our consultants on what else you need to consider besides costs.  UOB’s promotion may end after this week (or anytime for that matter without notice), so take action quickly.  Let us now take a look at how the two packages stack up:

BUC home loan

The two banks probably anticipated a strong reception to the first few high-profile launches of 2017 and wanted to start their new financial year with a roar.

How long will these offers last?  We think unlikely to be for too long a stretch.  The margins are so thin during the construction phase that we think only local banks with a lower cost of funds base can afford to offer that. Foreign lenders are unlikely to match and will miss out on the upcoming BUC new loans.  The only way to justify the margins will be from the perspective of building future income for the banks as upon T.O.P. most borrowers will make use of the free conversion to a fixed rate home loan with the existing bank.  It remains to be seen if the banks would extend the promotion period until the end of March to coincide with the soon-to-be-launched Park Place and Seaside Residences.  So take action quickly.

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Still this brief window of opportunity has added much excitement especially for first-time property investors and upgraders, as this is possibly the lowest interest rate we have ever heard of, at least for the period of the construction where there is no rental yield for investors!  And if the launches are priced correctly to sell, the next few weeks will be a bonanza time for property investors in Singapore.

Speak to our experienced consultants today to understand what are some of the unique considerations you should take note when it comes to BUC home loans, and how to choose what works best when signing up for a mortgage at the launch versus that when buying closer to T.O.P.

 

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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UOB OCBC DBS Mortgage

DBS, OCBC, UOB – 2016 Report Card

Last week the three local banks reported their full year financial results and here we summarized the key financial ratios with a closer look at their mortgage books.

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DBS UOB OCBC home loan

Across the board the three lenders have reported a drop in full year net profit largely a result of higher provisions for NPL (non-performing loans) in oil & gas sector.  The NPL ratio has also gone up quite significantly for DBS (0.9% to 1.4%) and OCBC (0.9% to 1.3%).  However if one takes a closer look at the growth in top line revenue, interest income for all three lenders have remained strong with DBS even improving it by 2.9%.  Although DBS reported a big drop in NIM (net interest margin) for the final quarter year-on-year from 1.84 (2015Q4) to 1.71 (2016Q4), on an annual basis it was actually the only bank that showed an increase in NIM from 1.77 to 1.80, whereas OCBC registered flat NIM growth and UOB’s NIM dropped (from 1.77 to 1.71).

Another noteworthy mention is how DBS has also managed to grow its non-interest income by a stellar 13% from $3.7b to $4.18b, a testament to the success of its Wealth business for both private banking and DBS Treasures, as opposed to a drop in non-interest income for its two local rivals.

It is hard to analyze the performance of the mortgage business in Singapore as the three lenders only provide aggregated figures across all currencies and countries where they operate.  We have to use some assumptions and do some smart-guessing.  Based on DBS CEO’s comment of a commanding 29% market share (which we assumed as at Dec 2016), and the total mortgage market of $192,099m according to MAS statistics (this includes bridging loan which we assumed to be an insignificant portion), DBS mortgage book in Singapore is around $55,708m.  This works out to be 86.4% of their total mortgage book of $64,465m as at end 2016 as reflected in their financials, the remaining 13.6% we assumed will be mortgage books from DBS Hong Kong and other overseas operations.

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It will be hard to ascertain whether OCBC and UOB does more or less mortgage business outside of Singapore operations than DBS.  For this exercise, we can only assume the same 86% share of their aggregated mortgage books come from Singapore operations and hence the respective S$ housing loan portfolio for the three lenders will be respectively DBS $55,708m, OCBC $51,728m and UOB $52,847m.  Hence collectively the three local lenders captured $160,284m or some 83% of market share in Singapore.  Incidentally the pie has also grown 4% in 2016 from $184,680m as at end 2015 to $192,099m, with the many completions of private and HDB units in the year.  DBS registered the highest loan book growth rate at 10% and all three banks outgrew the industry average increase of 4% which likely means they have captured market share from foreign banks in the mortgage business.  This is not surprising with the success of DMR home loans in Singapore in the past two years and we see this trend continuing unless foreign banks respond more strategically in order to arrest their dwindling market share.

With the introduction of DMR home loans, we also need to monitor the deposit books of the three lenders which has shown substantial increase in 2016.  Here DBS is the only bank that provides breakdown of their Sing dollar deposits base whereas the other two lenders provide aggregated figures across all currencies.  DBS has grown its S$ deposits by 8% from $140.8b a year ago to $152.1b.  Once again we see the anomaly here for DBS with its huge POSB franchise where CASA (current account & savings account) form 89% of its total S$ deposit base, as opposed to 51% for OCBC and 44% for UOB (we are comparing against all-currencies for the latter two).  On DBS’s chosen DMR loan peg, FHR18, if we assume only 20% of their fixed deposit base ($15.8b) come from small depositors of below $10,000 which works out to $3.16b, then we can conclude that FHR18 deposits form only 2% of their total S$ deposits base.

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With all three lenders under pressure from NPLs, besides improving bottomline through digitalizing services and driving productivity and a renewed focus on growing Wealth business the star performer in the industry, there is definitely impetus to grow NIM.  We have long maintained our view that the local banks would likely be the first to move on increasing their respective DMRs in order to benefit from a rise in interest rates.  We see at least one move on DMR before end of the year, more likely to come in the 2nd half when SIBOR picks up further.  Speak to us today to make your pre-emptive move before that happens.

 

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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Maybank mortgage rates

Maybank Launched DMR Home Loan

This past week (on 23 Jan 2017) Maybank became the latest lender to join in the battle for DMR home loans.  DMR (deposit mortgage rate) is a term we coined to describe all home loans in Singapore which are pegged to the lender’s pre-defined deposit rate instead of the usual 3-month SIBOR (Singapore Interbank Offer Rate).  The latter has been gaining popularity over the last 2 years and with this latest addition there are now five banks offering DMR home loans as follows:

fixed deposit mortgage rate

More and more banks are removing BOARD rates from their home loan offerings and instead replacing them with DMRs.  This is what we have predicted earlier that BOARD, being totally non-transparent, would very soon be a thing of the past with only a handful of lenders still offering.

 

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Eventually the market will choose between either pegging mortgage to either SIBOR or DMR which is the trend we foresee.  Currently all five lenders opt for a chosen fixed deposit rate to be their DMR for mortgage products, but we are not dismissing that in future there may be more variations thrown in like pegging to a CASA (current account savings account), especially one that helps drive deposits for the bank.

Are DMR home loans truly beneficial to homeowners or are they just the “new BOARD” in disguise?  So far the lenders who have launched DMR home loans have whipped out historical trends of their DMRs over the past 10 years to prove how their DMR have remained fairly stable since the global financial crisis of 2009.  Should that trend continues then DMR is surely the clear choice over SIBOR which is the first to respond to any interest rate hikes.  What is more important we believe is how the lenders manage DMR going forward as it is no longer a deposit or cost of fund per se to the bank, but also acts as a lever to raise interest margin when the need arises.  To this end we will be tracking DMR movements closely and it pays to work with a competent mortgage planner like us for your long term benefit.

Maybank pegged its DMR to its 36-month fixed deposit rate for deposits between $1,000 to $50,000.  As this rate is published on the bank’s website, just like the rest of the DMRs out there, it is a very singular and  transparent loan peg and any movements will be picked up by the press and all the mortgage comparison sites out there.  Lenders will need to deliberate carefully with each move on DMR and make sure that is justifiable with increased cost of funds, otherwise there might be backlash in the form of outflow of customer base to the next better DMR home loan package (and there will always be another bank more hungry for your business).

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Maybank also introduced two home loan packages on DMR with this launch – one floating rate package (as shown above) and another 1-year fixed rate package at 1.59%.   We tend to favour the latter with the gap between fixed and floating narrowing now to within just 30 basis points.  There is some perception in the market that it makes more sense to go for fixed rate of 2 to 3 years or longer.  However given the still uncertain outlook there might be some merits in going for a shorter 1-year fixed for immediate savings, and the ability to lock-in fixed rates earlier in 2018 rather than 2020.  Speak to our experienced mortgage consultants today who can do an interest modeling for you based on certain assumptions and give you valuable viewpoints to consider between fixed or floating rate mortgages.

 

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.

 

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HDB fixed rate home loan for refinancing

DMR Home Loans At Start Of 2017

Donald Trump will be sworned in as 45th President of United States in a matter of hours and all eyes will be on his first 100 days in office, from Europe, China to the rest of emerging markets (whose currencies were badly battered), and fund managers in financial market to corporate America, even US Fed.

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Closer to home, I believe all the lenders are also watching with a keen eye on events unfolding in the US affecting global trade, the strength of the the USD, and the pace of interest rate hike in 2017.  And before the “storm” (spiking cost of funds when the dollar resumes its uptrend) if there is one, banks being opportunistic have seized this time to try and capture more market share at start of the new financial year by coming out with “limited time period” promotional offers on their DMR (deposit mortgage rate) home loans.  Here’s a quick summary for the four banks offering DMR loans currently.

FDR comparison

DMRs is the generic term we coined for the category of home loan pegs based on bank deposit rates, as opposed to the more traditional SIBOR/SOR or lenders’ own internal BOARD rates.  The four banks that have introduced DMR mortgages in the past two years have chosen to peg DMR to pre-defined fixed deposit rates at the moment, ranging from 18-month to 48-month (and for specific deposit bands), but we are still hoping some foreign banks will start to offer DMRs pegged to some savings account rate which might make more sense for foreign lenders.

After a round of 1% DMR home loan packges by the 4 lenders in 2nd half of 2016, they have generally sensed the likely tightening of liquidity in money market this year and have now raised the minimum promotional rate to 1.50-1.60% range at start of 2017.  All packages now come with lock-in which is something we do not quite advocate on a floating rate package given the current sentiments, unless the differentials between that and fixed rate is wide enough to justify the risk.

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Having said that, DBS does stand out as an outright winner with its CNY promotion on DMR home loan with a new and interesting feature – a cap of 2% during the 2 years of lock-in.  This greatly reduces the risk of a runaway interest rate should Donald Trump be successful in reviving the American economy and US Fed follows through with its forecast of 3 rounds of rate hikes in 2017.  In that scenario and if we assume a similar increase here in 3-month SIBOR and DMRs, for the DBS package one will start 2017 at 1.48% but end the year close to 1.48% + 0.75% or 2.23% (3 round of increases at 0.25% each) without such a cap.  But with the 2% cap feature, your interest rate increases will stop at 2%!  In essence you can take this to be a 2-year fixed rate package at 2% but you are starting off at a low of 1.48%.

Would it be better than just to go for 2-year fixed rate home loan and remove all the guessing work?  Maybe.  Especially when there are still fixed rate packages below 2% right now but you have to work out the numbers after factoring in the savings at 1.48% with DBS.  Speak to our experienced mortgage consultants today who can do an interest modeling for you based on certain assumptions and give you the lowdown on all the latest fixed rate packages in the market.

 

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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Revisiting DMR Home Loans

With SIBOR rising again in recent weeks (currently 3M SIBOR at 0.922 as at 24 Nov 2016), it is a good time to revisit DMR home loans in the market currently only offered by four lenders: DBS, OCBC, UOB, SCB (StanChart):

deposit mortgage rate

DMRs (or deposit mortgage rate) is the generic term we coined for the category of home loan pegs based on bank deposit rates, as opposed to the more traditional SIBOR/SOR or lenders’ own internal BOARD rates.  The four banks that have introduced DMR mortgages in the past two years have chosen to peg DMR to pre-defined fixed deposit rates at the moment, ranging from 18-month to 48-month (and for specific deposit bands), but we are not dismissing the possibility of some banks offering DMRs peg to a special savings account rate in the future, which is what we hope for.

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The appeal of DMR lies in linking lending rate to a deposit rate so technically the lender would have increased its own cost of funds should it decide to hike lending or mortgage rates for borrowers.  Homeowners take comfort that this would in effect be some kind of self-checking mechanism on future rate increases.  However the reality is not so simple.  Since the inception (2014) of DMR as a new category of home loan pegs in Singapore, we have repeatedly cautioned that when banks adjust their DMR goes up, the hit on their cost of funds is miniscule compared to the revenue surge in banks’ NIM (net interest margin).  And we have also proven that using publicly-available data from DBS, the only lender to reveal its S$ CASA (current account & savings account) vs Fixed deposits composite, to demonstrate that the hit in raising FHR18 is likely only on 2% of its S$ cost base in the case of DBS.  On the other hand we speculate by now possibly more than half of its mortgage loan books are pegged to DMR.  The other 3 lenders probably will have a lesser skewed deposits structure compared to the “nation’s bank” with its huge POSB’s CASA base.  And perhaps SCB would be more dependent on fixed deposits than local banks.  Having said that, no one in the right frame of mind would walk into SCB to place a 48-month fixed deposit at today’s meagre rates.  Hence once again the cost impact will be minimal.

Our point is this – whether or not DMR proves to be just another BOARD rate in disguise, or it is truly a laggard to and hence less volatile mortgage peg than SIBOR, will depend on how the four lenders manage DMR movements going forward.  If the lenders mismanage this it will just become another BOARD rate which has irked many experienced homeowners in earlier decades (before the Great Recession) as being “first to rise but last to come off”.  To this end we will be monitoring very closely, and keeping all our clients informed should there be any unexpected surprises.  If you like to work with a trusted mortgage planning partner over duration of your mortgage, then speak to our consultants today.

 

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As we mentioned earlier, there is at least one big differentiating factor between DMR and BOARD rate.  While lenders have no qualms to up its internal BOARD lending rate at any time or by any frequency or amount, they will be more restraint in doing the same for DMR.  This is because DMR, unlike BOARD which can vary for different group of homeowners even within the same bank, is a singular rate for the bank that is published on its website.  Therefore it is a “high-visible” loan peg where any slight movements get picked up not only by established mortgage consultants like ourselves, but the press as well.  And when it comes to negative news, no one will want to take the lead and it is precisely for this reason that we speculate the big boys in the industry, ie. the 3 local banks that command easily 80% of the mortgage market, would have to go first.  And that is exactly what happened last December (23 Dec 2015) when DBS raised its FHR18 for the first time within a week of US Fed’s historic rate hike in a decade.  Banks need to justify making any such increases by allowing SIBOR to first rise substantially as DBS has demonstrated with a lag time of almost a year when SIBOR went from 0.60 at start of 2015 to 1.08 at the end of the year, though we do not think the lag will be this long going forward.  See historical SIBOR charts on our Resource page to get a better idea.

As all DMR mortgages come with a minimum of 2 years lock-in right now, homeowners need to think very carefully before signing on the dotted line.  Generally we do not advise lockins in an environment where rates are expected to trend up, except for fixed rate home loans where there is no risk of an escalating interest during the lock-in period.  However it may still work for some people who does not like the idea of refinancing every few years whenever the fixed rate ends.  It is also a case of choosing between the devil and deep blue sea when it comes to SIBOR or DMR home loans.  When federal funds rate moves up in US, SIBOR is certain to trend up almost immediately, whereas you take a chance that the lenders here will respond with subsequent increases in DMR or deposit rates in a responsible and justifiable manner.

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For those who do not like all the guessing work of how fast interest will go up from here, stick with fixed rate mortgages.  Speak to our consultants quickly as there may still be few packages left with attractive fixed rates below 1.60%.  We are expecting banks to raise fixed rates soon especially if SIBOR continues to go north bit by bit as we go nearer Dec’s FOMC where it is almost certain US Fed will hike rates again.  So you better move fast.

 

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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1% Home Loans – Bet Against The Banks?

What do I mean by that?

In recent months we have been getting a lot of enquiries on the “headline-grabbing” interest rate of 1% in the first year.  Some banks go close like 1.02% or 1.08% in the first year but with a slightly shorter lock-in period like 2 years instead of 3.  We hear many of our competitors also recommend these packages (let’s call them 1% home loans) and we are asked time and again – why do we not recommend them.  Some even think the reason why we don’t recommend them is because we are not paid a distributor fee for marketing these 1% home loans.  The truth is only one of these banks do not pay us and we even go as far as to tell all our clients which one, all because we always put our clients long term interest first.  Well they can go ahead and approach the banks directly but I seriously urge them read this article first before signing on the dotted line.

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Look, there is no free lunch in this world.  Ask yourself – if the 1% home loan is really that good and for real, why does the bank need to lock you in for 2 or even 3 years?  Why doesn’t the bank just do away with lock-ins (like some current SIBOR packages) or just do a one-year lock?  At 1% in the first year, notice it is even lower than 1M SIBOR packages which start from 1.17% in the first year with reduced spreads on SIBOR loans in recent weeks.  You may like to refer to our floating rates chart here (as at 13 October 2016).

What we have observed is that with the drop in SIBOR over the past months, the attention has shifted from fixed rates to 1M SIBOR packages in the third quarter, especially when more banks start slashing down their spreads or markups to compete for business.  However when some local banks start to introduce 1% home loans (based on DMR or Deposit Mortgage Rates) last month, with lock-in periods, suddenly the market seems to get caught up with this frenzy of 1% home loan and forgot about everything else.  Some clients would tell us “I do not mind a lock-in of 2 years at all if I am getting 1%”.  We don’t think that is a good idea and for good reason.

As a thought leader in the mortgage planning and advisory space in Singapore, we are concerned with this herd instinct of going for 1% home loans “blindly”.  Before we explain our rationale we first need you to understand how does lock-in work.  As the name implies, a “lock-in” is there to tie you down for a certain period of time like 2 years during which time you will be slapped with a penalty of usually 1.5% of the outstanding loan (or $10,500 for a typical loan size of $700,000) if you seek to redeem the loan in full.  You normally do this either when you sell the property or when you remortgage it to another bank for better terms when interest environment changes.  However one of the most neglected truth about lock-ins which you need to know is this – this penalty applies even if you choose to reprice with your existing bank, ie.stay with the bank but ask to vary the interest rates on your loan to another prevailing package.  You can always reprice by paying an admin fee if you are out of lock-in periods, but if you are still within, then you will be liable to pay the 1.5% penalty even though you are not “leaving for another bank”.

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Given how lock-in works, now relook at the overall proposition of the 1% home loans but in a different light.  When you sign on the dotted line for the bank to award you with a 1% in year 1, 1.45% in year 2 and 3, as you are unable to switch out of this package in the next 3 years whether it’s with another bank or the same bank, you are really taking on a huge “unhedged” position on interest rate movement – you are betting that interest rate will stay at these current low levels for the next few years or go even lower.  On the other hand, the lender is betting on the other position that interest is on its way up and hence it is willing to “bait” you with a ridiculously low rate in the 1st year, but with a view to recoup this “interest margin forgone” the moment interest rises in the subsequent years.  Does the 1% proposition still seem so attractive when cast in this light?  I am not so sure if you look at the macro picture now.

So let’s talk about interest rate scenarios in the next few years.  In this blog, we have since June conceded that we are unable to forecast SIBOR, not until December 2016 or later with “shock” events like Brexit and not until the US GOP election is over.  Well, quite a lot has taken place since then.  The market’s expectation swung from a “0% chance of rate hike this year with earliest move only in 2018” in the days immediately after Brexit, to the current odds of a 60% rate hike in December 2016 FOMC after recent hawkish comments made by Fed officials and the seemingly implosion of Trump campaign in the final weeks of the election.  This vindicated our stance that it is futile to try and forecast the federal funds rate hike, a precursor for 3M SIBOR our benchmark interest rate in Sinapore.  Since June we are of the view – just stay nimbleDo not take up any positions on interest rate movements but just go for the lowest floating rate mortgage but make sure there is no lock-in (or at least nothing more than a year).  Alternatively just pay a slight premium and go for the absolute lowest fixed rate mortgage ie. 2 year fixed rate.

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As we have mentioned earlier, the odds of a rate hike by December has been increasing over the months.  All the latest news seem to support this view with September job numbers out from US at 156,000 which is all not that bad on closer scrutiny by financial analysts, and the show of will by OPEC to finally start trimming production levels after 8 long years albeit it’s only a small cut.  Some experts in the market feel that oil prices may start to stabilize above US$60 per barrel by end of the year which will add to inflationary pressures in the US.  All these signs, along with a Hillary win in GOP next month, will reaffirm what Janet Yellen has already hinted as a “compelling case” for one hike in 2016 – December FOMC.  Should that happen you can expect local banks, already hard hit by rising NPLs from oil & gas sector, to capitalize on the event and raise DMR rates (controlled by the bank through deposit rates) to boost interest margin in a bid to shore up its revenue.

Although no one can foretell with 100% accuracy which way interest will go in 2017-2018, I do not think many would want to bet their money on rates languishing at these levels or with SIBOR going all the way back to 0.40 levels like in 2014. However when you sign a floating rate package with a 2 to 3 year lock-in, you are doing just that!  Perhaps no other mortgage broker has put it to you this way.  We beg to differ.  And we have saying this for a long time, if you really have to, at least look at average interest over the lock-in period of 2 or 3 years and use that for comparison instead of just 1% in the first year.

So do you still think that we don’t recommend these 1% home loans simply because we are not paid by some of these lenders?  And are you sure you want to take a bet against the banks when it comes to interest rate movements over the next few years?  Think again.

 

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.

 

Compare All Latest Rates 2018

 

 

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DMRs Are Like Pump Prices

Of late, with the slide in SIBOR and SOR post-Brexit, we have been hearing remarks like “DMRs are like petrol prices, so fast to move up the moment oil price surges, but when the price of oil falls, they never come down at all!”.  True indeed petroleum companies will always cite rising overheads to justify against a corresponding drop in pump prices.

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First what are DMR or Deposit Mortgage Rates?  These are essentially a new class of mortgage pegs first made popular by DBS, where the mortgage interest one pays is pegged to one of the published deposit rate designated by the bank, instead of the usual market-driven SIBOR rates.  In the case of DBS, the peg chosen is that of its 18-month Sing dollar fixed deposit rate for amounts between S$1,000-9,999, named FHR18.  Since the launch by DBS back in 2014, a few other banks have launched their own version of DMR namely – OCBC’s 36FDMR, UOB’s 36FDPR and the latest being SCB’s 48FDR.  As the name implies, these are all pegged to the respective bank’s fixed deposit for 36 and 48 month Sing dollar fixed deposit based on the defined deposit band.  Last year after US Fed raised its federal funds rate in a historical rate hike in almost a decade, DBS raised its FHR18 for the first time from 0.50% to 0.60% just a week later on 23 Dec.  As its 18-month fixed deposit interest at 0.60% is so close to OCBC’s and UOB’s 36-month fixed deposit interest at 0.65%, we have been speculatively the latter to move up next possibly sometime by 2nd half of 2016.  That does not look likely now with sudden plunge in cost of funds.

Those views were before the Brexit vote on 23 Jun 2016.  As rates were on the rise then, though temporarily disrupted by weak job numbers in the month of May, we were of the view that during such an interest uptick cycle, homeowners are better off on either a fixed rate mortgage or one that is on DMR as opposed to SIBOR home loans which will be the first to move up.  There was a sea change post-Brexit, an event that no one has expected.  In the weeks that followed, bond yields drop to such levels that signal the earliest rate hike could come only sometime in 2018!  In Singapore, interbank rates dropped back further with 3-month SIBOR coming off from approximately 1.00 to 0.87, and 1-month SIBOR touching 0.63.

Here at MortgageWise, we decided to suspend giving any forecast on rates for 6 months until the dust settles on Brexit and after the US Presidential elections.  The position we now take is to stay nimble – go on shorter 2-year fixed rate home loans if one wishes, and for those with bigger loans, maybe even consider going on SIBOR loans for the time being as long as there is no lock-in or minimal lock-in like 1 year.

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What prompted the change?  First we decided no one, not even the US Fed, knows what to expect next, especially if Euro crisis is to come back within the next 6 months or in 2017 leading to a breaking up of European Union.  No one is able to put a handle on how rates will move.  Believe no analysts or experts whose views can swing widely from rate hike off the table for 2016, to 30% odds of a rate hike in Dec, to the now 50% chance that Fed will move in Dec, following strong showing of economic data from the US in recent months.

Without the ability to forecast rate movements, it becomes rather difficult for homeowners to decide for example if it makes sense to switch from DMR loans back to SIBOR packages just so to capitalize on the low spreads and luring headline rates for year 1 at the moment, some from as low as 1.14%!  Right now it would seem that those who got the bandwagon for DMR loans earlier in the year or last year, when rates were rising, are paying higher interest now averaging 1.60% to 1.80%.  For those without lock-in, they could easily now switch back to SIBOR packages and reap a savings of almost 40 to 50 basis points, which translates into a savings of $2,800 in a year on a typical outstanding loan of $700,000 (using simple straight-line calculations of 0.40% on $700,000 which overstates the savings somewhat compared to amortization basis).

The real problem is in guessing when will SIBOR move back up again to render the whole exercise futile?  For example, if US Fed indeed starts hiking rates by 25 basis points in Dec, and 1-month SIBOR move back up to 0.85 from the current 0.63, even on the lowest spread SIBOR package now at 0.65% in the 1st year, that works out to a final interest rate of 1.50%.  There is still savings though if one is on DMR interest of 1.80% today.  That is the reason why we think it still make sense for bigger loans.  However, be prepared, should US Fed hikes rate again by middle of 2017, the interest would go back up to 1.80%.  At the very least, one would have enjoyed interest savings of at least 9 months to a year from the point the loan ports over to the new bank after a 3-month notice to refinance.  So for those who are keen to do this, there is a need to act quicklySpeak to our consultants today to assess if it makes sense for such a move.

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There will be no need to go through this remortgaging process so soon, if lenders are to adjust their DMR pegs down by 0.20% in response to a corresponding drop in SIBOR post-Brexit.  We do not see that happening anytime soon.  Not when you have the 3 local banks now feeling the heat from a possible fallout of their oil & gas exposure following the Swiber episode.

In an interest upswing cycle earlier before Brexit, DMR is the preferred or recommended mortgage peg which lags behind any increase in SIBOR hence it is less volatile and more stable.  The converse is true when rates start to come down – SIBOR will drop first!  To be fair to lenders, they cannot be moving their DMR up and down rapidly in response to any short-term changes in SIBOR, that is not the nature of how DMR is supposed to work.  But they do need to monitor the macro environment and if softness in rates persist into 2017 they might seriously need to review the value of the peg.

 

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.

 

Compare All Latest Rates 2018

 

 

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