In a symbolic move mimicking that of the US Fed Reserve which raised its benchmark federal funds rate last week in almost a decade, DBS raised its popular Fixed Deposit Home Rate (FHR18) by a tiny fraction in almost one and a half years since its inception back in Jun 2014.
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The bank has announced that with effect from today it will move up its fixed deposit rates for 12, 18 and 24-month to 0.35%, 0.60% and 1.00% respectively with the latter going up by the most from 0.55%. What this means is that its new FHR18 (based on 18-month fixed deposit) goes up by 0.1% from 0.5% to 0.6% p.a. Those who have signed on to the FHR18 package will now find their floating rate going up slightly for example from 1.55% to 1.65% p.a. for one of the packages. In the same breath the old FHR has also gone up from 0.40% to 0.675% p.a. which is basically playing catch up with rising Sibor which has increased in the past year from 0.40% to 1.12% today. To be fair the bank has waited for more than a year (since last October 2014) before making its first move. (To recap the old FHR is the earlier version based on the average of its 12-month and 24-month fixed deposit rate for deposits in $1,000 to $9,999, whereas FHR18 launched in Oct this year which replaces FHR is based solely on 18-month fixed deposit rate.)
While at this blog we have earlier speculated that DBS will likely move its FHR18 only when 3-month reaches the range of 1.5-2.0% sometime in 2ndhalf of 2016, this move has come 6 months earlier than what we anticipated. We may not always be right in our forecast. The way we read this is that the bank probably needs to answer to its shareholders as it kicks off a new Financial Year commencing Jan 2016 and they need to show improved interest margin with rising sibor. Perhaps then one way of not being just at the receiving end of the interest uptick in next few years is to go long on DBS stocks at the right price especially during market corrections. That way at least you sit easy knowing that while you have to pay more interest on your mortgage, you are also getting it back on share price appreciation being a shareholder of the bank over the medium to long term. Do however note equities entail big risk in short term. Caveat emptor.
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Wait. Are we now abandoning our recommendation on FHR18 and deposit-based mortgage loan pegs in general? Certainly not. On the contrary, we like to take stock at this juncture and revisit some of earlier tenets we have put forth in supporting deposit-based mortgage pegs and see if they still hold true.
1. Deposit-based Loan Peg Will Be The Last To Go Up
To put things in perspective, even before and in anticipation of the actual interest rate liftoff in the US, 3-month Sibor in Singapore has almost tripled from 0.40% last October 2014 to 1.12% today. The local banks have waited for about 6 months before revising their Board rates up by more or less the same margin of 0.60% sometime in Q2 this year. Finally the first increase in deposit-based mortgage peg happens only after more than a year and it goes up only by a third that of Sibor and Board, ie. around 0.20%.
This same pattern will still hold true going forward – Sibor will always be the first to move and deposit-based mortgage peg will always be the last and with the least increase.
2. Average Interest Over 3 Years Could Still Be Lower Or Level With Fixed Rates
In a similar way how stock market rallied after US Fed’s 1stliftoff in rates as it removes uncertainty in the market, we can now have a “little bit more certainty” on FHR18 movement. What do I mean?
In a way, now we can do some “smart-guessing” on the likely increases of FHR18 notwithstanding that this could be too simplistic a way to look at bank’s funding strategy. If we assume there is 0.20% increase in FHR whenever 3-month Sibor moves up by 0.60% to reach say 1.80%, 2.80% and 3.80% by end of 2016, 2017 and 2018 respectively, then over a 3-year period FHR18 will end off at around 1.50%. So if you sign up on the lowest floating rate package today by DBS at 1.65 you will end off year 3 at FHR18 (1.50)+1.05 or 2.55% p.a. It may seem high but remember by then when Sibor reaches 3.80% (if it reaches that high at all with a 25 basis point rate hike every quarter which we do not think so) everyone else will be paying 4.80% and fixed rates will be at 5.0%! On a straight-line basis, even in such a rapid rate hike scenario, your average interest over the 3-year period will be at just 2.1% which is more or less matching that of the nearest 3-year fixed rates today.
Just like the liftoff in US, the first increase is FHR18 though symbolic but what is more important is the pace of future increases from here; so do not knee-jerk and just switch to the easy option of fixed rate which entails the need for refinancing whenever the fixed term ends incurring costs and much higher rates again. It boils down to one’s individual objective and situation which are all unique. Hence do speak to one of our consultants here for the best recommendation. In the first place we do not think rates will move up at such a rapid pace which will be covered in our next article.
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3. The Bank Will Be Careful To Justify Each Increase
Some people have argued that FHR18 is just another board rate which the bank could raise easily. We think it takes on a slightly different nature than traditional board rate. First there is some impact on the bank’s costs of funds when it raises its deposit rates albeit this impact is quite insignificant and we have covered that in one of our first few articles on FHR. Second and more importantly, deposit rates are a lot more transparent than board rates (banks have many different board rates for different batches of mortgages signed and no one knows how much and how many times each one has gone up over time) and any slightest movements will be subject to massive scrutiny from the public and the ensuing repercussions– some existing customers may reprice or refinance out especially those without any lock-in. If you choose to work with us here at MortgageWise you can be assured that we will be tracking all these movements for you.
In other words, banks will be careful to calibrate each increase in its deposit-based mortgage peg and to make sure Sibor must have first gone ahead a lot 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 in Singapore and the creditable distributor of mortgage products for Singapore banks and financial institutions.