(F) couple pondering over which mortgage loan

Choosing the Right Mortgage Loan Peg

In recent months, some banks have stopped offering home loans based on fixed deposit rate and re-introduced BOARD rates for their home loan packages.

In this article we will take a closer look at the different types of mortgage loan pegs available in the Singapore market and how one is preferred over others at different periods of interest rate cycles.

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What Is A BOARD Rate?

This is probably the oldest form of mortgage pricing widely practised all over the world where the bank pegs the home loan interest rate to a pre-defined lending benchmark called BOARD rate.  Banks normally have different BOARD rates for different purposes like commercial property loans, private property loans, HDB loans, etc.  Different banks also call it by different acronyms from MR (mortgage rate), MRP (mortgage rate plus), SRFR (Singapore Residential Financing Rate) to EFR (enterprise financing rate) for commercial loans.  No matter which name it goes by, the nature of BOARD rate remains – it is determined solely by the bank in accordance with general market interest rate movements.  The actual interest charged to homeowners would usually be BOARD rate less a discount factor, or more recently, it has become BOARD rate plus a margin.

The biggest problem with BOARD rate is that it is difficult to track as it is an internal rate determined by the bank from time to time and this information is not published anywhere publicly.

Why SIBOR Was Used To Price Mortgages?

To understand why this lack of transparency is an issue with BOARD rates, we need to revisit the history of how SIBOR (Singapore Interbank Offer Rate) became widely used as a mortgage loan peg from 2007.

SIBOR over last 30 years Singapore

Back in mid-2000s when US Fed started its last tightening cycle, homeowners in Singapore were paying skyrocketing interest rates as high as 4-5%. These were variable packages on BOARD rates which was the only mortgage loan peg available in the market back then. One can imagine fixed rates would be even higher in those days.  As banks raised their BOARD rates, there was much unhappiness amongst borrowers and complaints which eventually led banks to seek out a more transparent loan peg to be used for mortgage pricing.  SIBOR or interbank lending rates, administered by the Association of Banks in Singapore (ABS), were used to price mortgages for the first time in 2007.  ABS would calculate and publish on its website the SIBOR rates for 1-month, 3-month, and so on based on the bid and offer quotes from 20 participating banks in the interbank market daily at 11.30 a.m.

Lenders could then price their mortgage loan packages based on the published SIBOR rates by adding a spread or margin.  SIBOR would become the most transparent (published daily) and neutral mortgage loan peg as no one bank could unilaterally increase its value.  Homeowners could also compare mortgage loan packages from the various banks based on the lowest spreads quoted.  Monthly repayments would be calculated or “reset” on a rate-setting date every 1-month, 3-month or even 12-month depending on the SIBOR tenure to which the mortgage loan is pegged to. The monthly repayments would stay the same until the next reset date.

Indeed, SIBOR-pegged home loans became popular and the pre-dominant choice amongst homeowners especially in the next decade when interbank interest stayed low for long periods.

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FDR Mortgage Loan Peg – An Innovation In Singapore’s Market 

However, when SIBOR started rising in late 2014 after oil price collapse and the end of loose monetary regime in the US, things start to change.  By this time, DBS pioneered a new category of mortgage loan pegs called FHR (Fixed Deposit Home Rate) where it pegs DBS home loan interest to its pre-designated Sing dollar fixed deposit rates of various tenures from 12, 24, 18, 9 to the current 8-month.  This is likely a first-of-its-kind in the world for mortgages.  The market took to it by storm aided by the perception of meagre fixed deposit rates in Singapore, meaning mortgage loan interest pegged to FHR would likely stay low. Before long, other banks also launched their own versions of such mortgages based on fixed deposit rates, which we now refer to collectively in this blog as FDR (fixed deposit rate) home loans, and FDR took over SIBOR as the preferred mortgage loan peg in the last few years.

As interest cycle heads further north with US Fed now on track for 4 hikes this year after it last raised the federal funds rate in September, SIBOR being an interbank rate would always be the first to respond to any drying up of liquidity in the banking system.  On the other hand, as banks need to justify any increases to FDR loan pegs, there is usually a lag time before they play catchup with SIBOR.  So far this year, we have observed this lag to be generally around 3 to 6 months.  This re-affirmed our view that in an interest rate upswing cycle, FDR will be preferred over SIBOR due to this laggard nature – SIBOR would need to move first and quite significantly.

What is more uncertain is the choice of BOARD rate which is essentially like a “black box” where we are unable to track its exact movements over time.  Will banks exploit this lack of transparency to increase BOARD rate more often than necessary, or to increase even more than the run-up in SIBOR?  We can only hope that history does not repeat itself.

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.

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