(This article was last updated on 31-May-2022, check here for latest DBS home loan rates and contact us for detailed tracking of DBS FHR history since 2014.)

DBS has introduced its latest tranche of FHR6 back in Feb 2021, which replaced the earlier FHR24 for DBS home loans.

By now most in the market, except for new home purchasers, will be quite familiar with the different tranches of FHR by DBS Bank.  FHR stands for Fixed Home Rate defined as the published BOARD rates for fixed deposits of various tenors for deposits between $1,000 to $9,999.  DBS successfully pioneered the use of fixed deposit rates as mortgage pegs back in June 2014, starting with the original FHR which was the average of two other FHRs technically – the 12-month and 24-month tenor .  It had since introduced other tranches of FHR over the years from FHR18, FHR9, FHR8, FHR24 to the current FHR6.  We have observed that each tranche of FHR will last typically about 18 months or so for sufficient home loans to be pegged to it before it will be closed off and a new FHR tranche introduced.

As such, we are expecting DBS to start introducing a new FHR tranche in the next 3 to 6 months, or before the end of the year in 2022. Those who are contracting on FHR floating rate home loan packages need to be aware of imminent increases in all mortgage pegs be it BOARD rate or FHR following U.S. Fed’s fastest tightening cycle in history.

Confused by now?  Just make sure you don’t confuse FHR home loans with fixed rate home loans as we still get some clients telling us that today (They thought what they signed were fixed rates)!  FHR is simply a mortgage loan peg where you opt to peg your home loan interest rate to the published fixed deposit rates designated by the bank.  So, if the bank should revise its deposit rates, your home loan interest will also be adjusted.  It is not a fixed rate home loan where the interest rate you sign up for stays fixed for the duration of the lock-in period.

Other than 3-month compounded SORA, FHR is the primary mortgage loan peg used by DBS and your fixed rate home loan will revert to a floating rate pegged to FHR when fixed rate term ends, typically after two or three years.  

We refer to all such “fixed deposit rate” based home loans collectively as FDR home loans in this blog.  StanChart is the other bank who offers such a FDR home loan peg in Singapore, based on their own definition of FDR.

So, are FDR home loan pegs good for borrowers?

The view in this blog is – Yes.  Because interest rate has essentially crashed to a historical low (refer to our chart on interest rate cycle) in Singapore, the only direction for interest rates is to move upwards at some point.  In 2020 when interest rates is going south, SIBOR or SORA is a better mortgage peg in order to benefit from the fall.  But as we enter another ascent phase in the cycle starting from 2022, FDR being more of a laggard becomes a better mortgage peg in theory. It’s a laggard to rate increases as banks typically will hold off immediate upward adjustments for a good three to six months, sometimes even longer. However, the flip side is when such adjustments are finally made it can come in big increments like a 0.50% or even 1.00%. Eventually, homeowners will still have to fork out more for higher mortgage repayments in a rising rate environment.

When contracting for FDR floating rate home loans, the lock-in period becomes an essential consideration, as well as at which point are we at in the interest cycle. The last thing you want is to sign on a floating rate just when the bank decides to hike FDR pegs across the board and you are bound by it for another two more years of lock-in. In a rising rate environment, especially when it rises so quickly like this year, it’s better you “price in” some initial hikes of 0.50-1.00% at least for the first year. In other words, don’t just trust the headline rate that you see today, just imagine that you will be paying a much higher rate later on. That way, you have a better comparison across all packages. To be fair, even SORA-pegged packages will also rise over time.

In a rising rate environment, especially when it rises so quickly like this year, it’s better you “price in” some initial hikes of 0.50-1.00% at least for the first year.

Of course, if U.S. Fed fail to engineer a soft landing and we get a protracted global recession, interest rates might come down and the reverse is also true — FDR pegs will be the last to come down unlike SORA which will be more elastic. So, in a recessionary environment, market-linked mortgage pegs will do better than FDR or BOARD rates in general.

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