choosing the right mortgage pegs

Choosing The Right Peg – Board, SIBOR Or FHR?

At this moment there are still that one or two banks left offering a 2-year fixed rate at below 2% p.a. but not for very much longer we think.  Talk to us quickly if you are keen to fix your monthly repayment especially for loans above $1M.

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With impending first liftoff of the funds rate by US Fed in December, SIBOR (Singapore Interbank Offer Rate) is poised to rise further from the current levels of 1.13%.  We think the 3-month SIBOR will likely hit 1.2 to 1.4% range by end of the year, especially if the confidence crisis in China subsides after October.  With that it means fixed rates will soon rise up beyond 2%.  For homeowners who do not wish to tie themselves down to fixed rates of above 2% or those who may want to sell their property soon, what other options are there?

Floating rate mortgages are adjustable rate mortgages where the rate is adjusted according to a chosen index or what we called a loan peg.  The bank then derives a profit or markup above this peg called the spread (or in the case of board rate a discount factor below the peg).  Generally there are 3 types of loan pegs used in Singapore, namely money-market index usually 3-month SIBOR or SOR (Swap Offer Rate), bank’s internal board rate for mortgages, or the relatively new FHR (Fixed Deposit Home Rate) on DBS home loans.  There are probably more than 50 home loan packages in the market offered by about 13 financial institutions both local and foreign but if you sieve through them closely you will see that amidst different spreads and features you are really just choosing between these 3 loan pegs – Board, SIBOR or FHR.

Of the three floating rate loan pegs, SIBOR will always be most volatileand first to move or respond to a rate increase.  The 3-month SIBOR (now 1.13%) has already increased twofold since last October following the sudden oil price collapse when it was then just 0.41%  FHR, a unique peg by DBS Bank, that is pegged to the average of its 12-month and 24-month fixed deposit board rates for deposits in the $1000-9999 band on the other hand was launched last June 2014 at 0.40% and has yet to move.  It is definitely more stable and less volatile than SIBOR as you can see from one of our proprietary chart below that shows the correlation between SIBOR and a “re-constructed FHR” over the past 30 years.  However at some point it is inevitable for it to head north with rising rates and if you have been following this blog you will note that our view is that DBS might start to move its FHR when 3-month SIBOR hits 1.5% and beyond which we think might be sometime around mid to end of 2016.

Board rate, which is determined solely by the respective banks, falls somewhat in between SIBOR and FHR when it comes to volatility or how elastic it is to interest rate movements.  There is still some laggard effect though to SIBOR as the bank will need to justify each raise in order not to turn off too many existing clients.  For example one local bank raised its board rate from 4.5% to 5.1% only sometime in April after SIBOR has started rising since October 2014 from 0.41% to over 1% in the same period – a lag of 6 months.  Another Malaysian bank we were informed has announced raising its board rate by 0.25% from next month October onwards which is a lag of almost one year.

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In an environment where interest is expected to go up like what is happening today, we do recommend opting for FHR peg over Board and certainly over SIBOR.  In fact we do think for homeowners who choose FHR, there is a good chance that there may not be a need to refinance so often later on unlike fixed rate mortgages where the rate always revert to one with a much higher spread once the fixed rate term expires in two or three years (the norm in Singapore).  This makes a lot of sense especially for those with small or mid-sized loans in the $200,000 to $700,000 range where the transactional costs of refinancing like legal fees etc often do not justify the savings derived.  Also banks tend not to give legal subsidy for loans below $500,000 when it comes to refinancing and even if they do, at 0.2% of loan the subsidy will not be able to cover the legal fees in full which means there is still out-of-pocket expenses for home loan refinancing.

At the moment, DBS is still the only bank with a deposit-based mortgage loan peg and we are hoping that another local bank will respond soon with an equivalent to give borrowers more options.

At, we seek to be your home loan Singapore solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner when you buy your next Singapore condo. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

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