lock in fixed rate mortgage before interest rate hike

SIBOR 1-Month Or 3-Month?

We have been getting that question more often as 1-month SIBOR and 3-month SIBOR converged at the 1.88% level in recent weeks (as at 19 Aug 2019).  So, I thought it may be good we give our take in this blog.

Compare All Latest Rates 2019

 

As our views and recommendations are always backed by data, we will take a look at the paths of the 2 indices over the last 5 years.  This is especially important if you believe history tends to repeat itself.

SIBOR 1 month or 3 month

 

First, for the benefit of those new to mortgages in Singapore, SIBOR stands for Singapore interbank offer rate – the rates that 20 Contributor banks who participate in the interbank market lend or borrow from one another where bids and offers are submitted to ABS (Association of Banks in Singapore), the administrator for SIBOR, and published every business day morning at 11.30am. Incidentally, in a bid to make SIBOR more reflective of true market activities, there is ongoing transitional testing (July to Dec 2019) for a new version of enhanced SIBOR on a new waterfall methodology which will come into effect by next year and by which time 12-month SIBOR will be discontinued.

 

What we do need to understand as end-borrower, is how our mortgage interest rate is set if your loan is pegged to 1-month or 3-month SIBOR respectively. We will start with 1-month SIBOR. If your home loan rate review (or rate-setting) date is on the 5thof every month, the bank will look at what is the value of 1-month SIBOR published on this date and your mortgage rate will then be set accordingly as per your contract.  For example, if you have contracted with the bank for a spread of 0.30% above 1-month SIBOR, your interest rate will be 1.88% (1-month SIBOR now) + 0.30% = 2.18% for the next month and the bank will send you an advice on the exact repayment amount for next month based on 2.18%.  This exercise is repeated every month and in periods where there is little volatility or movements in SIBOR, you can expect to be paying more or less the same amount every month.

 

The same happens if you are contracted on 3-month SIBOR.  The difference is your interest rate and hene the monthly instalment amount is set only once every quarter instead of every month.  For example, if your rate review date falls on the 15thof Oct, the next rate review date will be on 15thof Jan, followed by 15thof Apr and so on.  Your interest rate will be set or “fixed” for a 3-month period each time.

Compare All Latest Rates 2019

 

Fixed Rate Effect Of 3-month SIBOR 

For this simple reason of having a “fixed rate” effect over 3-month, we hold the view that in periods where interest rates are rising it would theoretically be better to be on 3-month SIBOR than 1-month, and the converse will be true when interest rates come down.  Having said that, the difference might not be that significant if the increment is gradual over time as both will eventually move in the same direction. We always like to give the analogy of paying additional $1 every month or paying $3 more every 3-month.  Homeowners will still benefit slightly on fixing the rate every 3-month when interest is moving up, but that’s provided the increase is linear which may not always be the case.  As you can see from the historical chart, there are many periods where SIBOR simply trade sideways for long periods as it moves in steps on its way up or down.

 

Gap Between 1-month SIBOR and 3-month SIBOR

Another observation is the gap between 1-month and 3-month SIBOR which hovers at around 0.12-0.13% in recent years since 2018 but has now converged.  We also noticed this gap seems to widen when rates are falling but narrows during periods of upswing in rates.  So, if this pattern holds true and rates tumble over the next two years, then we can expect to see the same wideing of gap like back in 2015-2016.  Or it could turn out to be just a blip like what happened towards the end of 2017.  All that depends to a large extend on the outcome of the protracted trade talks between US and China this year and beyond.

 

Traditionally we know that banks tend to levy a higher spread on 1-month SIBOR than 3-month SIBOR due to this gap.  Hence at this moment when the two indices converged, home loan packages pegged to 3-month SIBOR packages would present lower headline rates than those pegged to 1-month.  This may change when the gap opens up again or widens.  To be honest, we do not presumed to know the forces behind how interbank market work but we noted this is not the first time that the two SIBOR indices have converged in the past.  And each time, after a brief period of inflection when the market finally figured out the new direction be it up, down or sideways, the gap opens up again.

Compare All Latest Rates 2019

 

Conclusion

While 3-month SIBOR offers more stability in terms of having to pay and manage a fixed amount of monthly repayment which resets only every 3 month, we are of the view that the elasticity of 1-month SIBOR to any changes to rates makes it a more preferred index during periods of interest rate downturn.  On the contrary, when interest rate heads north, the better option is not floating rate on 3-month SIBOR but rather a fixed rate home loan.  Add to that the notion of a seemingly widening gap between 1-month and 3-month SIBOR when rates fall, our gutfeel (we cannot be 100% sure on this) is that homeowners would be better off on 1-month SIBOR rather than 3-month SIBOR over the long term.

 

Banks like to push 3-month SIBOR to borrowers instead of 1-month.  In fact, we have heard of some banks phasing out 1-month SIBOR altogether which may suggest it is less profitable than pegging their mortgage books to 3-month SIBOR? If indeed it is less profitable for lenders, surely it must mean homeowners would have more to gain on 1-month SIBOR somehow?  Food for thought.

 

MortgageWise.sg seeks to be thought leader for all things mortgage-related in Singapore.  We may be a small team but we deliver big value to our clients over time – giving our unique insights and half-yearly forecast on interest rates, and putting together exciting benefits for both new purchase loans (a special $1,800 legal fee for completed property) and refinancing loans (a $150 valuation fee offset), both subject to min loan of $500,000.  Other terms apply.

 

So, speak to our consultants now!

 

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals. That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

 

Compare All Latest Rates 2019

 

 

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Local Banks’ Mortgage Books 2019 1H

All three local banks DBS, OCBC and UOB have just reported their financial results for first half of 2019.  We present our usual snapshot of the key indicators for their mortgage books.

Compare All Latest Rates 2019

 

OCBC UOB DBS Mortgage Books 2019 1H

 

Some may be wondering why do we monitor the three local lenders’ mortgage portfolios? We are probably the only mortgage consultancy firm that does that on a regular basis.

 

Because it does tell us a thing or two about the motivations of the respective banks to compete for business in the year.  Housing loans is such a big portfolio on the banks’ asset books, often the biggest segment by industry breakdown and constituting 20-25% of the total loans they dished out; the banks will not allow their market share to slip if they want to do well. And if you also include their lending to developers or the building and construction industry which forms another 20-25%, the banks’ total exposure to the property market in Singapore is close to 50% of their total income-generating assets (or loans).

 

So how did the three local lenders, which easily make up 85% of the mortgage market in Singapore, fare in the first half of 2019?  We know there had been many rounds of mortgage peg increments earlier in the year which is tracked and reported in our blog here at MortgageWise.sg. As a result, the banks have continued to build on the momentum of interest rate uptrend since 2018 and raised lending rates faster than deposit rates or cost of funds leading to widening of interest spreads or NIM (net interest margin).  Take for example the case of DBS, after doing a 10-basis point jump in full year 2018 NIM from 1.75 to 1.85 by end of Dec 2018, 2019 quarter two’s NIM has went up further to 1.91 – the highest amongst the three local banks. This is not surprising as we have said many times in this blog DBS has the most control on interest margins where all housing loans are pegged to their proprietary FHR (fixed deposit home rate) mortgage pegs set and adjusted by the bank.  They also have the lowest cost base from the huge CASA (current account, savings account) deposits from their POSB franchise – accounting for 89% of their Sing dollar funding (see above, $141.77b out of $159.55b).  On the contrary, fixed deposits form close to half of the funding source for OCBC and UOB which is very likely the reason why both banks have withdrawn the FDR pegs some time ago.

 

Compare All Latest Rates 2019

 

 

We do note however that UOB’s NIM has gone down by two basis points in the latest quarter, when compared to their full year 2018’s NIM.  But it is also the only bank to have held on and grew its mortgage books marginally whereas both DBS and OCBC have lost ground in terms of market share most likely to foreign lenders who have muscled in on mortgage business this year, especially the likes of HSBC, SCB and CIMB.

 

By and large, the financial performance of all three lenders in 2019 thus far have been helped in a big way by widening spreads on interest margins earlier in the year.  However, that is set to change in the second half with more headwinds for the global economy and continued slide in interest rates.  US Fed is now expected to take more aggressive stance in rate cuts depending on outcome of the roller-coasting trade talks between US and China.

 

As we look at the books, it then comes as no surprise that we see DBS rolled out a fixed rate of 1.89% in the first year that is even lower than prevailing floating rates – an anomaly.  As we all know in business, to grow profits you either work on the margins or the volume, if not both.  With spreads compression expected in the coming months and going into 2020, both DBS and OCBC would need to go more aggressive in getting their loan books volume up.  In fact, OCBC registered an even bigger $2.3b net loss in loans compared to DBS’s $1.1b in the first half.  I am somewhat surprised the bank is not going all out yet to acquire more new loans than what is shedded when many refinanced out.  Perhaps because the bank has locked in a strong pipeline of BUC loans and it is expecting more progressive draw-downs over the next few years?

 

It was reported at end of 2018 that DBS has a commanding 31% market share with its $75b housing loan portfolio (note this is across all countries, we do not have the breakdown for Singapore’s share which we estimate at 86% of total). Going by the latest numbers, it is reasonable to expect that the three local banks have ceded some market share to foreign lenders thus far in 2019.  We should see the local banks go more aggressive in their home loan marketing and promotions going forward.

 

Compare All Latest Rates 2019

 

 

Speak to us today to find out how you should choose between the local banks’ and foreign banks’ offerings.  The foreign banks have slashed margins to razor-thin on SIBOR loans since start of the year to win business and prima facie it has worked so far.  The local banks have upped the ante now by offering even lower fixed rates aided by their cost base advantage.  Which one should you go for in view of the macro events taking place right now?

 

At MortgageWise, not only do we show you all the home loan packages in our exclusive Rates Report that truly allows you to compare them all at one glance, we pack in great exciting values for both purchase (special $1,800 legal fee for completed property) and refinancing ($150 valuation fee offset) loans, both subject to min loan of $500,000.  Other terms apply.

 

For the same packages that you get by going direct to the bank, you save even more and derive greater value when you apply through us today.  So, speak to our consultants now!

 

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

 

Compare All Latest Rates 2019

 

 

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US Fed Cuts Rate!

In line with our expectation last month, US Fed has just announced a quarter percentage cut to its Fed funds rate to bring it down to within a range of 2% to 2.25%.  But this was much smaller than what the market has expected (a cut of 0.50%) and hence leading to a slight sell-off on Wall Street.

Compare All Latest Rates 2019

 

We have argued last month that this really amounts to an insurance cut in a bid to extend a 10-year old bull market and this is exactly what Fed Chair Jerome Powell said: “I see the US outlook as being a positive one.  The downside risks are really coming from abroad.”

Indeed, the US economy is still holding up well with GDP for first half of the year averaging 2.6% growth, unemployment at 3.7%, 224,000 jobs added in month of June (average monthly of 172,000 this year), and with Fed’s preferred measure of inflation that strips out volatile food and energy prices staying stubbornly low at 1.6% (below Fed’s target of 2%).  The real threats are coming from abroad with US exports slowing down and business sentiments and investments in US dampened by trade war tensions as companies pulled back.

Whether this marks the start of a full interest rate cycle reversal (which Fed does not think so at this point) or just a blip depends a lot on the outcome of trade talks now resumed between the two global economic powerhouses; the outcome which is something hard to predict but we remain fairly optimistic that there will be some kind of a deal at some point.

This latest cut – the first in 3½ years since US Fed first started hiking rates back in Dec 2015 – has further vindicated our view at the start of the 2019 when we started recommending going back to SIBOR-based floating rate home loans and some clients were puzzled.  They asked why are we not proposing fixed rates (as offered and recommended by their repricing banks) against a backdrop of escalating rate hikes by more and more lenders in Singapore where most seen their mortgage interest increased by average of 0.60% in a short span of 4-6 months. Our view is that this pace of 9 rate hikes over 3 years by US Fed is unlikely to be sustainable with trade tensions already brewing in the horizon.  And indeed, US Fed has been forced to make a U-turn in March FOMC by tapering down on hike expectations from two to zero for 2019, to now a rate cut on the contrary!

Compare All Latest Rates 2019

 

We are likely to see more downward pressure on SIBOR in the coming weeks and months as a result of the latest rate cut and the general dovish and accommodative interest rate environment globally.  There is also the liquidity excess stemming from weaker economic activities in Singapore which is now coming to the fore after months of contraction in global manufacturing demand.

Speak to our team of consultants here at MortgageWise where we discuss interest rate trends and bring you the latest of our insights and analysis, along with accurate tracking of all FDR mortgage pegs by all banks here in Singapore. Better yet, refinance your home loan through us today to enjoy our special rewards benefit of Tangs shopping voucher (subject to min $500,000 loan).  See more details here.  Or pay a special legal fee $1,800 all-in (inclusive stamp duty & gst) for the purchase of private properties (resale only).  Terms apply.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

 

Compare All Latest Rates 2019

 

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Fixed Rates Fallen Below 2%!

To be more precise, that’s for the Year 1 headline rate.  By now some might have heard about the latest National Day promotional home loan package rolled out by DBS this week which is a 3-year fixed rate package that comes with a free conversion after the first year:

DBS 1.89 Fixed

Well, we seemed to have a knack of predicting interest rate trends.  Just last month we said that we will not be surprised to see fixed rates falling back to sub-2% level should US Fed decides to cut rates after FOMC (July 30-31) this month.  What is surprising is that it happened even earlier than the Fed meeting.  We are seeing fixed rate going below 2% for the first time this year, albeit that’s only for the headline Year 1 rate (the average over 3 years is actually 2.08%). And already one other bank has already matched this package and perhaps more banks will follow suit by dropping below 2% next month?  You never know.

Compare All Latest Rates 2019

 

What I find most intriguing is that you have many mortgage brokers out there aggressively marketing this package but without telling clients that if you apply for the same package online and direct to DBS, you actually get additional $200-500 in cash rebate (for refinancing cases, up to $3M loan).  This is over and above what you get for the normal cash rebate ($1,800/$2,000) when you apply through a broker.

Wait, you must be wondering why are we telling you this?  Aren’t we also a broker and wants you to apply for this same package through MortgageWise?  Before you run off to DBS website to apply directly, come speak to us first.  We have put together an even better offer for you when you apply through us, which I believe you will agree with us.

This goes to underscore our commitment to all clients since 2014 – we are here to work long term with you and we will always tell you whole-of-market home loan packages, even those where the bank may not be paying us.  We hope and trust that when we abide by this philosophy of always taking care of clients’ interests first, they would reciprocate by supporting the team at MortgageWise even when the going gets tough and some lenders may choose not to pay us occasionally.  We still want to do the right thing.

And remember, only by keeping comparison sites and mortgage brokers in business will there be price competition and lower rates for all homeowners eventually, thanks to the free market.

Compare All Latest Rates 2019

 

Finally, a word on falling rates.  It is indeed an anomaly to see headline fixed rates going below prevailing floating rates of average 2.00% to 2.08%.  However, this is not the first time it happened.  The next question we get asked is – how low can it go from here?  With falling fixed rates since the start of the year at 2.58% now dropping to 2.08% for a 3-year fixed rate, it could be a signal that banks who are privy to trends in the interbank market are expecting SIBOR to go even lower in the coming months.  This means two things homeowners could do in a still uncertain market due to trade war.

Either:

  • Lock down fixed rates now which may not be too far away from the floor after already falling 50 basis points this year, OR
  • Lock down unprecedented low spreads on SIBOR home loans which ensures you will benefit from any continued downward pressure on interest rates due to Fed’s rate cuts in the short term, and for that matter, in long term too when we finally get to a recession at some point.

 

So, speak to us today to find out how you will always get the best deal for mortgages, be it for refinancing or new purchase loan when you work with MortgageWise. Besides giving you the lowdown on all packages in the market, benefit from our unique rewards and referral scheme, which includes a special legal fee privilege of paying only $1,800 all-in (inclusive stamp duty & gst) for the purchase of private properties when you take a minimum of $500,000 new loan through us.  Terms apply.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

Compare All Latest Rates 2019

 
 

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OCBC and UOB hike FDR and OHR

FDR Still Going Up?

As the thought leader in all things mortgage in Singapore, we track closely any movement in interest rates amongst lenders. The latest bank to announce a slight revision up to its FDR (fixed deposit rate) home loan peg is StanChart – by a mere 15 basis points increase this time.

Compare All Latest Rates 2019

 

Here’s a closer look at the increases on FDR tranches from SCB home loans:

BankMortgage PegOld RateNew RateIncrease ByEffective Date
SCB9FDR0.901.070.1710 Jun
36FDR1.221.370.1510 Jun
48FDR1.351.500.1510 Jun

 

Does that signal cost pressures (or the need to acquire more deposits) and foretell similar moves by other banks with FDR mortgage pegs soon?  To be honest, we do not have the answer.   We have explained in this blog previously that the cost structures of banks are different and lenders also have different motivations from time to time – there are periods whereby one bank become less aggressive in acquiring new loans and another bank picks up the slack in competition. Hence when it comes to funding costs and motivations, it is a “black box” to us.  Notwithstanding the general dovishness in interest rate outlook for 2nd half of the year, we noticed some banks have in recent months revamped their high-interest account mechanics for example DBS’s Multiplier Account. It does seem that some banks are out to acquire more deposits.

All eyes are now on US Federal Reserve’s FOMC decision in two weeks’ time – should there be at least a quarter percentage rate cut which is now widely expected by the market (or latest by September), SIBOR the benchmark interest rate in Singapore would likely face some downward pressure.  And should FDR home loan pegs still remain stubbornly high or move up further due to cost pressures, perhaps it is time to make the switch from a bank-set mortgage loan peg to market-determined loan peg like SIBOR.

To do that homeowners could simply reprice within their existing bank to a SIBOR package if one is available, to take advantage of the unprecedented low spreads on SIBOR loans unseen in almost a decade thanks to free market compeititon.  Alternatively, they could also speak to us to find out who has the most competitive spreads for SIBOR home loans in the market currently.

Compare All Latest Rates 2019

 

Do not get us wrong.  We are not discrediting FDR home loan peg which we have been advocating in this blog over the last few years when interest rate cycle had been going up.  However, we have maintained our view, since the onset of such FDR home loans in the Singapore mortgage scene from 2014-2015, that when the cycle reverses at some point – SIBOR home loan peg would be preferred as it will come down first!  SIBOR is driven by interbank market demand and supply and is not subject to the unilateral decision of any one bank to increase or decrese its BOARD or FDR mortgage peg.  And looking at the three possible interest rate trajectories (see below) as presented in a recent article, we think the likelihood of a flat or downward trajectory (2 & 3) looks very real.  Still we cannot be 100% sure about this.

us fed funds rate

 

We believe FDR home loan peg will also have to come down at some point in a prolonged interest rate decline.  However, as it is still so new as a mortgage peg in Singapore where we do not have for example a  twenty-year historical data to track the correlation between FDR pegs and SIBOR, it is hard to conclude in a recessionary environment how long a lag it would take before banks will adjust deposit rates down.  The fact remains that since inception of FDR home loan pegs – deposit rates which are linked to mortgages are no longer pure “cost of funds” for the banks but take on the nature of a lending index or peg akin to another type of BOARD rate.  It is a lever for the bank to increase or lower its interest margin on mortgages over time where it now exercises greater control.  We will need to go through a full economic cycle of boom and bust of minimum 10-15 years before we can truly scrutinize this relationship and draw any meaningful conclusions on the appeal of FDR as a mortgage peg over the long-term.

We do have historical tracking charts of FDR home loan pegs for the various banks over a 3 to 5 year period depending on when particular FDR tranches were launched.  Speak to our team of consultants to request for a copy for your own bank. And you might just want to take this opportunity to explore who has the most competitive home loan packages out there.  Apply for your home loan through us and receive a $150 Refinancing Valuation Fee Offset, or a special rate of $1,800 Purchase Legal Fee (includes stamp duty & gst), both subject to min loan of $500,000.  Terms and conditions apply.  Speak to our consultants today.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

 

Compare All Latest Rates 2019

 

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australian mortgage rates

Mortgages In Australia Now Cheaper

RBA (Reserve Bank Of Australia) had cut the cash rate for the first time in 3 years earlier this month (4 Jun 2019), bringing it down to a historical low of 1.25%, in a resolute bid to extend a record 28-year run (its last recession in 1991) without going through a recession for the Australian economy. And the cash rate is now widely expected to drop below 1% before the end of the year.  Is this a good time to enter the Australian property market?

Compare All Latest Rates 2019

 

 

Over the past decade the central bank’s benchmark interest rate has been steadily falling from over 7% to the current 1.25% and analyts are expecting that this might even go below 1% very soon should the trade row between US and China, the two global economic powerhouses, deteriortate further.  The latest cut represents the government’s resolve to stave off ill effects of rising unemployment, low wages, a property market in doldrums and a below-target inflation.

 

On the bright side, things may have bottomed out a little as global real estate investors sit up, take notice and smell the opportunity to enter the market soon. Some analysts are forecasting that the property market would bottom out before end of the year especially with the feel-good factor from the return to power of the Coalition Government in the May 18 elections.  Already the monthly declines in home prices in the two major cities of Sydney and Melbourne are slowing to within 0.50% drop in May, going by figures released by CoreLogic the leading property research firm in the country.  Indeed on the Australian mortgages front, we have also seen renewed interest from clients in both Hong Kong and Singapore leveraging up to snap up bargain deals especially in cities like Melbourne where prices have corrected more than 10% from its peak in Nov 2017 (figures from CoreLogic). This steep fall in home prices for Melbourne, a favourite purchase destination for Singapore and Hong Kong investors, over the last 2 years is now slightly more than property price correction seen in the last recession of 1991.

 

A number of factors have helped to contribute to the optimism of a housing market pickup in Australia this year, barring any further ramifications from US-China trade war:

  • The central bank has lifted a cap of 30% on interest-only mortgages for new loans since Jan 2019
  • The new coalition government installed in May has quickly announced a new purchase deposit scheme for first-time homebuyers where locals who qualify would need to just put down 5% deposit instead of the usual 20%
  • APRA (Australian Prudential Regulation Authority), the stat board that supervises the financial industry in Australia, has proposed changes to the serviceability assessment of borrowers. Since 2014 the regulator has required lenders to apply a 7% interest tests on borrower’s repayment ability (akin to Singapore’s TDSR interest rate of 3.50% used when calculating loan limits for residential properties).  Previously this test threshold was set at 7% or a 2% buffer above the actual interest rate, whichever is higher.  The problem is that with cuts in cash rate since 2014, the prevailing interest rate most Aussies are paying are hovering around 3.50%-4.00% for owner-occupied properties and effectively this means 7% would be used across the board for all Australian mortgages be it for own-use or investment. APRA is now proposing scraping the floor of 7% and allowing lenders to set their own buffer for affordability test as long they keep to a mandatory minimum of 2.50% above the actual interest rate charged.  This would likely see Australians gain access to more mortgage loans going forward.

 

 

Incidentially, CoreLogic is forecasting a drop in prices of up to 18-20% in this current trough cycle for the two prime cities of Sydney and Melbourne and expect the Australia property market to bottom-out by mid of 2020.  It might happen earlier than expected as the current downturn is triggered not so much by rising mortgage rates or slowing demand, but a credit crunch or clampdown in borrowing.  Prices might recover earlier than expected should there be more credit easing from the new liberal government commited to show results.

Compare All Latest Rates 2019

 

 

Here in Singapore, following the cut in Australia’s cash rate, we have seen on average a drop of 0.20% on most lenders’ cost of funds (COF) for 3-month AUD .  Some Singapore banks pegged their Australian mortgages (financed in AUD) to this COF wich is internal to the bank but which tracks the cash rate closely from our observation.   Hence, the prevailing interest rate for financing in AUD has now dropped somewhat to 3.60-3.80% which is more or less in keeping with rates from Aussie banks downunder.

 

Back to the question of investing in Australian property market?  It was reported only this week that one of the world’s largest asset manager BlackRock is shorting the Aussie dollar as it is betting on RBA cutting the cash rate all the way down to 0.50% in order to revive the economy.  Against the backdrop of falling mortgage rates and hence a weakening Aussie dollar, and with property prices in favourite cities like Melbourne and Sydney likely to hit rock bottoms by mid of next year maybe earlier, we certainly believe the case for investing in Australia looks fairly attractive again, as long one has the holding power.

 

 

Global real estate investors in Hong Kong, Asia and elsewhere may be pleased to know that they can finance their Australian property purchases from Singapore banks who offer competitive floating rate mortgages close to rates offered downunder, but with an additional choice of currency in AUD or SGD. Investors could then benefit from movements in the currency pair of AUD/SGD and switch financing from one to another depending on the economic cycle.  Financing in AUD with a weakening Aussie dollar means a smaller loan when converted back to SGD terms later and benefit investors who could then pay down using SGD funds when they also start a Premier banking relationship with banksin Singapore.  So, speak to us today to find out more details on Australia mortgages.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals. That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

 

Compare All Latest Rates 2019

 

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Falling Fixed Rates – Who’s Right?

Fixed rate mortgages in Singapore have seen quite a drop in rates since the beginning of the year when most banks offer 2-year fixed at 2.58%.  Of late banks have been trying to match and outdo one another with lower headline rates for fixed rate mortgages – from 2.38% to 2.35% to the latest at 2.28% (deviated basis only available when you speak to us)! That was a steep fall of almost 0.30% within a span of 5 months!

 

Compare All Latest Rates 2019

 

 

Isn’t it good news for homeowners when interest rate falls?  Well, not when one just repriced and started a new loan contract on a fixed rate mortgage at 2.48-2.58% with a new lock-in for two more years at those rates, all that barely three months ago.

 

For one thing I know, writing this article is not going to go down well with everyone.  Those who have chosen to take a bet on floating rates with SIBOR home loans at the start of year as fixed rates were simply too high (that’s our general recommendation this year) will now be thankful; but those who signed on the higher fixed rates earlier on the advice of their own repricing banks or other brokers alike would now be feeling the blues and worry if interest rate would slide down further from here.

 

This is the problem when one speaks only to existing bank when they seek to refinance their mortgage, believing that it is effortless to just reprice with the existing bank and not shop around to see what else is out there.  Another scenario when one speaks directly to bankers trusting in their advice and wrongly concluding that they will get a better deal when they go directly to banks instead of through a mortgage broker as there must be loading on their package when a third party is involved.

 

In both of those situations above, what homeowners miss out is the fact that bankers are really sales representatives of their respective financial institutions selling specifically mortgages and charged with sales target to meet where they also earn commissions paid out by the banks.  It is funny how people are generally guarded when they talk to bankers on investment or insurance products like unit trusts, endowment plans, etc but let their guard down when they speak to mortgage specialists from the banks.

 

Compare All Latest Rates 2019

 

 

Now don’t get me wrong here.  We are not discrediting mortgage bankers, afterall we do work with them too.  What we simply want to point out is that – though there are many good professional mortgage bankers who give good advice, they are still restricted to selling what is offered by only one bank.  And banks often do not offer the same kind or the full range of mortgage loan pegs in the market ranging from SIBOR, BOARD to FDR (fixed deposit rate).  Some do not even offer fixed rate mortgages.  And when their own bank is not offering what is popular or what homeowners are asking for, being sales-focused, bankers will peddle the next best option from their repertoire.  And for the first quarter of 2019, that next best option seems to be fixed rate mortgages that every repricing bank is peddling and feeding on the fear of runaway interest rates, until suddenly US Fed reversed its stance in March.

 

Contrast that with the advice one gets when working with brokers, who are independent third-party distributors of mortgage products from all lenders in Singapore.  We take a more objective view as we are not restricted to selling products from just one single lender.  That means we will be able to offer the full range of mortgage solutions in the market or recommend mortgage loan pegs based on what is most suitable at different points in the interest rate cycle – for example we have always said (since we started in 2014) that when the cycle reverses down and interest falls, SIBOR would the most preferred mortgage peg as it is the most elastic and hence the first to fall.  Remember, another significant difference between the advice of a broker versus that from a banker – we are in this for long-haul and we need to make sure we give the right advice, failing which we will have no repeat business every two to three years come renewal.

 

Finally, back to that all-important question – is it really true one gets a lousier deal when going through a broker for a mortgage as the bank would need to pay a third-party referral fee?  Not true.  The best example I like to give is when one buys an Macbook.  One can buy it from the Apple Store at Orchard and get supposedly better service, or buy it from a third-party distributor like Challenger store. Same item, same controlled-price, but you get more promotional freebies buying from third-party stores.  We have already explained this, bankers are sales representatives who earn commissions on the transactions, on top of basic salary. When there is a third-party broker involved, the banker just earns less commission on the deal, in exchange for bigger volume of business from the broker.  The home loan package and the final interest rate would be the same for homeowners but he or she gets much better information and more impartial advisory from the broker whose business interest is aligned with that of the client’s long-term interest.

 

Compare All Latest Rates 2019

 

To end, we come back to the question of falling fixed rates: Will 2-year fixed rates continue to slide down below 2.28%?  As I have forewarned at the beginning of the year, 2019 is going to be most difficult year to do interest rate forecast no thanks to the trade war.  All eyes will be on the actions of US Fed.  The market is now expecting up to two rate cuts with one coming as early as July next month.  We will listen for clues on Fed’s FOMC meeting for June coming right up next week so say tuned to this blog. If US Fed indeed cut rates before the end of the year, there will be downward bias for SIBOR and we will not be surprised fixed rates may go all the way back down to 2% or sub-2% level. Still, this is not a done deal.  A lot still depends on the outcome of US-China trade negotiations which has stalled for now.  If we do get some kind of resolutions soon enough, sentiments will change. In this current environment it is all the more important to stay nimble when choosing the right mortgage package and we think free conversion becomes an indispensable mortgage loan feature to this end.

 

Not convinced yet that it is better to take your loan through a broker?  Refinance with MortgageWise and you will receive a $150 Refinancing Valuation Fee Offset, subject to min loan of $500,000.  New purchase home loans will also enjoy a Special $1,800 Purchase Legal Fee (includes mortgage stamp duty, gst) from our partner law firms.  Other terms and conditions apply.  So, speak to us today.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

 

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shock that banks can raise spreads on home loans

They Say SIBOR Is Volatile

Bankers often like to say that when marketing mortgages pegged to BOARD rate or FDR (fixed deposit rate), but without regard for which part of the interest rate cycle we are in.

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This reminds me of the same situation about five years ago when interest rate began its slow accent in Singapore following oil price crash towards end of 2014 – bankers then touted BOARD rates as the most stable mortgage peg as it had not moved in the last 5 years.  Of course!  Because there was no reason for rates to move back then with US Fed pump priming an economy into life via three rounds of QE (quantitiative easing) if you recall.

My point is simply this – the context is important.  Just like how property investors who bought during the market peak in 1996 barely broke even when they sold off 10 years down the road; or how those who bought in the property market doldrums of early 2009 enjoyed spectacular profit margins. The same goes for interest rate cycles – those who had locked down fixed rates when rates were on its way up during 2016-2017 had made some wise moves; doing the same when we are near an inflection point now or near the peak of the cycle runs the risk of being stuck with a high rate should interest rate tumbles down.

Incidentally we forecast this back in March 2016 that interest rate should take 5-6 years to peak in this current cycle which means we are somewhere near the end by 2020/2021.  In recent weeks, more dovish statements by US Fed chair (who started dropping the phrase “Fed will be patient”) has got financial markets now pricing in at least one rate cut by US Fed before the year is over, maybe two.  So the cycle could even turn much earlier.  All eyes will be on the next major Fed FOMC meeting in two weeks’ time which we will be covering, so watch this space.

Back to question on the volatility of SIBOR. That is certainly true as it exhibits a much wider swing from peak to trough (see graph below).  However, that is both a boon and a bane depending on which part of the interest rate cycle one is in. When interest rates are going up, having one’s mortgage tied to SIBOR means interest rate and hence the monthly repayment will be revised upwards every month or every 3-month (for 1-month and 3-month SIBOR respectively) whenever SIBOR increases.  On the other hand, when interest cycle reverses and rates start dropping, the converse is also true – one sees the monthly repayment being adjusted down immediately the next month (for 1-month SIBOR)!

Compare All Latest Rates 2019

As SIBOR is determined by money market forces and not dependent on the unilateral decision of any one single bank, we are of the view that should interest rate cycle reverses downwards, SIBOR’s volatility would make it the first amongst all mortgage pegs to fall.  We cannot say the same for BOARD or even FDR (which really has become a lending rate) where it may take up to 6 months or even a year for banks to adjust down as doing that too soon would mean a cut in the banks’ interest margin for the current financial year.

HSBC has just adjusted up their TDMR24 in May last month from 0.65% (unchanged since its launch in Dec 2017) to 1.40%!  It is the latest and last bank to hike FDR rates. Whether lenders will continue to hike on FDR pegs from here depends on the movements of SIBOR.  For the time being with no expectation of further rate hikes from US Fed this year, we are seeing mortgage rates stabilizing more or less at the current levels be it SIBOR or FDR.

So in conclusion, SIBOR is indeed volatile as what bankers claimed, but not necessarily in a negative way.  It can also work for the benefit of homeowners when interest rate cycle reverses. FDR mortgage pegs have worked well over the past few years until banks start to move up aggressively on FDR (as well as BOARD) pegs towards the end of 2018.  The crux is deciding at which part of the interest rate cycle are we at right now, and for that the best way is to take a look at the historical trending chart of US Fed funds rate vs SIBOR which we have shown in our article last month, and ask ourselves which trajectory is the most likely?

us fed funds rate

Refinance with our team of mortgage experts here at MortgageWise and you will receive $150 Refinancing Valuation Fee Offset from us, subject to min loan of $500,000. New purchase home loans will also enjoy a Special Purchase Legal Fee of $1,800 (all-in cost including mortgage stamp duty, gst) from our partner law firms.  Other terms and conditions apply.  So, speak to us today.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

Compare All Latest Rates 2019

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how to choose fixed vs floating

Fixed Or Floating – 3 Trajectories

With interest rate seemingly at an inflection point, many are finding it hard to decide between fixed or floating rate home loan in Singapore.

Compare All Latest Rates 2019

Most people still find the current fixed rate home loan at almost 2.40% (lowest 2-year fixed rate in the market now range from 2.34-2.38%) a tad too high for their liking, after being so used to sub-2% interest rate for the most part of the past decade.  On the other hand, if one does not lock in fixed rate, what’s worst than starting with floating rate at 2.13% (lowest floating rate on 1-month SIBOR) and seeing that rate go all the way to hit 3-4% in the next few years?

In fact, this is one of the most difficult times to make this call even for professional analysts and economists whose job are forecasting.  At MortgageWise we give our own forecast at the beginning of each year on where we see 1-month and 3-month SIBOR ending by the end of the year.  We will review this forecast every 6 months which means soon – after Fed’s FOMC next month.  So, watch this space.

The key driver for how interest rate in Singapore moves is still down to US Fed action.  To a lesser extent there are other factors too like the strength of the dollar (SIBOR has risen by 6 basis points in reent weeks as trade talks broke down between US and China), and the state of the local economy when banks become flushed with funds unable to lend out during economic slowdown (SIBOR actually tumbled in 2016 as a result of that even in absence of rate cuts from US Fed, see graph below).

Compare All Latest Rates 2019

For this reason, we track the correlation between US fed funds rate and 3-month SIBOR (the benchmark interest in Singapore) very closely on our website:

us fed funds rate

It has taken US Fed a total of nine rate hikes over 3 long years since Dec 2015 to bring the fed funds rate from near 0% to 2.50% by Dec 2018, and 3-month SIBOR has responded in tandem rising from approximately 1% to 1.12% to 1.88% in the same period.  The correlation is strong between the two.

To help our clients, we further extrapolate the three most likely paths for US fed funds rate which will give us a fairly good idea of how SIBOR will move going forward.

Will US Fed continue to hike at the same pace – another 9 hikes over the next 3 years to bring the fed funds rate to 5% (Trajectory 1 in red)?   If that happens, surely SIBOR here in Singapore will follow in tandem and rise up to hit 3.50-4.00% which last happened in June 2006 when it peaked at 3.56%!  Add the spread and this means every one will be paying mortgage interest in the region of 4-5%!  More likely, the global stock market will crash so badly that it will force the Fed’s hand to cut rates long before that could happen.

Then there is trajectory 2 (in blue) which will be based on Fed’s current forecast of having either zero hike or perhaps one hike per year over the next 3 years – this trend assumes that trade war is eventually resolved and the global economy gets back on the growth path but the pace of rate hikes slows down dramatically – a much gentle slope of cimb compared to the preceding three years.

The final trajectory 3 (in green) is also a probable scenario where fed funds rate come tumbling down to revive an ailing economy that either gets overheated and crash, or a recession triggered by other factors like tariffs either on the demand side or supply side of things.  Certainly, judging by the pattern exhibited over the last 30 years, a dip does tend to follow after a brief period when Fed holds the rate steady which lends credence to the theory of a market crash typically a year after the yield curve inverts (the yield on 10-year Treasury note dipped below that of 3-month bills on 22 March 2019 for the first time since mid-2007, although it has recovered and go back and forth since).

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What is the conclusion?  There are two school of thoughts here – the general consensus is that the current interest rate cycle has either peaked or is somewhere near the peak as we are in a different world where inflation pressure is no longer like what it used to be with internet and global sourcing keeping prices in check.  There is a smaller group who believes the bull run still has legs and the uptrend will stay its course albeit at a much slower pace.  Don’t forget we also have to factor in macro events like how long it takes to resolve the current trade impasse, any potential Brexit fallout, US Presidential mid-terms next year, etc.

Speak to our team of professional mortgage consultants who can guide you through in this deliberation process.  Don’t forget besides deciding on general direction of interest rate movement, there are also other salient factors to consider when deciding between fixed or floating rate home loan, some which people overlooked:

  • Size of the outstanding loan
  • Owner-occupied home vs investment property?
  • Stability of one’s income
  • Ability to do partial prepayment
  • Any Intention to sell?

Besides getting our views, refinance through MortgageWise and you also receive $150 Refinancing Valuation Fee Offset from us, subject to min loan of $500,000.  Other terms and conditions apply. Speak to us today.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

Compare All Latest Rates 2019

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About Deleveraging

With prevailing interest rates much higher than last year, we certainly see more people contemplating doing a lumpsum paydown whilst refinancing their home loan.  Then there are those purchasing their first property but opting for a much lower LTV (loan to value) than what they are entitled to (maximum 75% for first mortgage) for very much the same motivation – to reduce debt.

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Nobody wants to make the banks richer.  It definitely makes financial sense to deleverage as interest rate rises especially if it goes above 2.50% (CPF Ordinary Account interest), and if one is holding on to surplus funds in cash or fixed deposits. It might be hard to achieve such risk-free returns.  Still, we like to share some thoughts on this topic of paying down debt versus access to liquidity as we think more deliberation may needed.  Some of these considerations are often overlooked.

 

1. Drawing Out Equity Term Loan Later May Be Difficult

To illustrate this point, we use a typical purchase scenario of a first-time home buyer (couple) who could be borrowing a typical loan of $750,000 towards purchase of a unit at a new launch project:

Purchase Price                        = $1,000,000

Downpayment in cash            = $50,000        (5% deposit)

Combined CPF to be used      = $200,000

Bank Loan                               = $750,000      (maximum 75% LTV for 1stmortgage)

Let’s now suppose instead of using $750,000, the couple decides to take a smaller loan of $500,000 as they like to deploy all their cash on hand of $250,000, hence they will be using total of $300,000 cash towards the purchase (ignoring transaction costs and stamp duties etc):

Purchase Price                        = $1,000,000

Downpayment in cash            = $50,000        (5% deposit)

Combined CPF to be used      = $200,000

Cash to be deployed                = $250,000

Bank Loan                               = $5000,000    (LTV only 50%)

Let’s imagine 5 years later and the value of the property has now appreciated by 20% to $1.2m.  The couple now plans to buy a Universal Life plan which requires an upfront payment of $300,000 in premiums and they reckoned it would be good to take out an equity term loan (ETL) from the property.

Property valuation                               = $1,200,000

Outstanding loan                                 = $420,000

CPF used (add accrued interest)         = $370,000 (both initial lumpsum plus servicing over 5 years)

An ETL is a loan taken against the equity portion of the property value, which would have increased over time from both a reducing loan and a rising valuation; it is disbursed directly as cash to the borrower and must of course come from the same lender who has a charge on the property.

Equity Term Loan eligible to be withdrawn = 75% of valuation less outstanding loan less CPF used

= 75% of $1,200,000 – $420,000 – $370,000

= $110,000

To their surprise, the amount they could withdraw is less than half the additional cash portion ($250,000) they have deployed voluntarily at point of purchase.  And they were hoping for more than $250,000 as their property has also increased in value by $200,000.

The same situation will occur when homeowners prepay partially on the loan using cash on hand whilst refinancing; when situations change later on and they decide to go back and ask for a term loan on the mortgaged property, they might be disappointed especially in situations when a lot of CPF funds has been utilized over the years.

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2. Access To Liquidity – Worth Paying?

So, what are some of these situations that may require access to liquidity or cheap source of funds?  The list below is by no means exhaustive:

  • Investment opportunity (eg when stock market crash, distressed sale, etc)
  • Starting a business
  • Buying protection and annuity in lumpsum when it is cheaper (eg Universal Life plan)
  • Childen’s overseas education
  • Family crisis due to accidents, medical costs, etc
  • Tide over challenging times when there is change in employment situation

Here we are referring to financial commitments beyond the usual emergency or rainy day funds which financial advisors generally advise setting aside at least 6 times of one’s salary or income.  Some people might feel more secure with a 12-month’s buffer.

When situations arise that require a sudden lumpsum commitment – the cheapest source of funds one can lay hold of has got to be that from an ETL as it is secured against an asset.

In a report covered by Straites Times just last month, both MAS and IBF (Institute of banking and finance) estimated that 100 out of 121 jobs in the finance sector of Singapore would see tasks being displaced by automation and AI within the next three to five years.  The finance sector is not alone here.  This trend is happening world-wide and all industries will be impacted in the next 10 years.

With such forces shaping labour markets today that is unseen in past decades, our government is certainly worried.  Job security is no longer what it used to be. There is wisdom to ensure one has access to liquidity at all times, rather than paying down to the maximum on a mortgage with no leftover funds to help service the loan duing such unforeseen periods which may last longer than expected.

 

3. Interest-Offset Account May Be A Solution

For those who with substantial funds on hand and unsure of how much of it to pay down on a home loan, an interest-offset account may just be the solution.  For full explanation of how that works, you may refer to a recent article here.

 An interest-offset account has the same effect of prepaying down on a home loan, but without having to actually prepay. In that sense, it is the “most ideal” replacement for ETL as one can effectively withdraw or get back the same amount of cash used to prepay when there is a change of plan, without being subjected to restrictions on ETL limits and unaffected by CPF usage in the property.

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 This is where some people get confused.  We often get feedback that the return from such an interest-offset account is not attractive enough as one can easily beat this rate by investing in bonds or other investment vehicles like REITS, Perps, etc. That is true.  However, we are not talking about comparing yield or returns from investment.  All investments carry risks.  Just look at preference shares of Hyflux.  And it’s easy to put money in, but not always the same when it comes to taking money out.  If bond prices crash all of a sudden, investors might not be able to liquidate without incurring a substantial loss.

Interest-offset account is a place to park liquid funds (where there is no intention to deploy for investments where one may lose access or even the principal sum), and the more appropriate comparison woud be fixed deposit account or high-interest savings account like DBS Multiplier, OCBC 360, UOB One Account, etc.  For the former, one often needs to commit at least 12 months to get a reasonably-good interest rate.  For the latter there is often a cap, with the need to spend a certain amount on credit cards. In situations where one is unable to maximize such risk-free returns from various banks, and finds it hard to keep track of all qualifying criterias that keep changing, the easiest way is perhaps “pay down” a substantial amount in an interest-offset account. Period.  No hassle. No tracking. Withdraw and put back anyime when needed. Or perhaps get an interest-offset account as a standby “risk-free” interest-earning facility, when you move your liquid funds in between the various promotions for fixed deposits and high-interest savings account.

It is also noteworthy to highlight, with an interest-offset account, there is somewhat of a “reverse compounding savings effect” as more of the monthly repayment each month goes into reducing the principal loan, thereby leading to lower interest to be paid in the following month, and so on.  We will illustrate this point in a subsequent article so watch this space.

Speak to us today if you are looking to refinance to a mortgage with an interest-offset feature and enjoy a special $150 Refinancing Valuation Fee Offset from us, subject to min loan of $500,000. Other terms and conditions apply. Speak to our consultants today.

 
 Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

Compare All Latest Rates 2019

 
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