Since the start of this month February, DBS has introduced a new tranche of FHR6 which replaced the earlier FHR24 for DBS home loans.
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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 is 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 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.
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.
At this moment though, DBS does not offer floating rate FHR home loans. With interest rates in Singapore at all-time low, banks are selling more fixed rate home loans which give better spreads to the banks. Still, as FHR is the primary mortgage loan peg used by DBS, you DBS home loan will revert to a FHR-pegged home loan when the 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.
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So, are FDR home loan pegs good for borrowers?
The view in this blog is that – 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 a recessionary environment like in 2020 where interest rates are going south, SIBOR is a better mortgage peg in order to benefit from the fall. But should we enter into another ascent in rates, then FDR being more of a laggard becomes a better mortgage peg in theory.
In the short term where rates are going nowhere, we do think that no bank will want to incur the wrath of their existing clients by raising their BOARD or FDR pegs. Hence, should you be considering a floating rate home loan based on FDR, the rates that you sign at the point of acceptance becomes the most crucial.
It becomes “like a fixed rate” in the short term – it will unlikely go up or go down. And if you manage to negotiate for rates pitched correctly near to 1%, that’s definitely lower than fixed rate home loans over the next few years.
Of course, things can change should SIBOR shoot up in a V-shaped suddenly. We think that is highly unlikely and we will cover that topic in the next article in our blog. So, stay tuned.
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