Deposit Mortgage Rate Vs SIBOR Mortgage

DMR Vs SIBOR Home Loans

There are generally 3 types of mortgage pegs which home loan packages are pegged to in the Singapore market – BOARD, SIBOR or DMR (Deposit Mortgage Rate).  The bank then adds a “spread” or markup on top of this peg like a profit margin, or it can also subtract a certain discount rate from BOARD to arrive at the final interest rate for homeowners.  DMR loan is the latest kid on the block where it is tied to the bank’s chosen deposit rate – only two banks have launched this so far with DBS defining it on their 18-month fixed deposit rate and OCBC on their 36-month fixed deposit rate.  Similar to SIBOR loan, a spread is added on top of DMR to derive the final interest which is where the confusion begins.

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How does one compare between DMR (Deposit Mortgage Rate) and the traditional SIBOR home loan?  It seems like even some bankers we talk to get confused between the two and wrongly equate the spread of DMR packages with that of SIBOR packages and conclude that the latter is so much lower and better for homeowners.  Or rather they tell clients that DMR spreads are too high and they are not getting a good deal.  Is that really true?

For quick illustration, let us take a look at two most competitive home loan packages with the lowest spreads currently available in the market, where one is based on DMR and the other on 3-month SIBOR:

Compare Deposit Mortgage Rate And SIBOR

Obviously one cannot just look at the spreads per se when choosing the packages, as even though DMR loan spreads seem to be so much higher than those of SIBOR loan be it in the initial years or thereafter rate from year 4 onwards, the final interest rate are somewhat similar.  Here in this example we are looking at two packages with constant spread throughout the entire loan tenure and the difference in the spreads are 1.20 less 0.70 or 0.50%, but the final interest are close in the 1.76-1.80% range.  The banks have already taken into account the lower DMR base compated to SIBOR when they priced-in the spreads. In fact the reason why there is such a big difference in the spreads between the two is simple and logical – there is marked gap between the two underlying loan pegs in the first place.  3M SIBOR is now at 1.06 (as at 11 Apr) while DBS’s DMR peg which it calls FHR18 based on their 18-month fixed deposit rate (for amounts between $1000 and $9999) is at 0.60, or almost half that of SIBOR.  It is this gap between SIBOR and chosen DMR that is of most importance and not the spreads.  It follows then there should be two key considerations that homeowners need to consider:

  • How volatile is the underlying peg in itself?
  • How does DMR move in relation to SIBOR, ie. is this gap maintained over time or does it narrow or widen?

Compare All Latest Rates 2018

 

To answer the two questions the best way is to go back and look at some historial data. (This section has been updated in 2018, two years after this article was originally posted).

 

interest rate and FD linked loan peg movements

 

From the recent movement in the various FDR home loans (formerly known as DMR) against SIBOR, one can see quite clearly that FDR pegs are less volatile and indeed tend to lag behind SIBOR when rates go up.

 

There is however one significant difference between the two pegs – SIBOR is determined by market forces (demand vs supply of money market) whereas DMR is set unilateraly by the bank.  So caveat emptor.

Before we end, for the sake of accuracy, we need to clarify that the bank’s NIM (Net Interest Margin) is based on the actual interest charged less its real cost of funds.  And real cost of funds is really a combination between SIBOR & deposit rates depending on whether it is a foreign bank or a local bank with access to huge deposits base in Singapore.  Hence comparing the spread of SIBOR to that of DMR packages is like comparing apple with oranges.  In the case of local banks who probably are net lenders at SIBOR rate to other banks in the interbank market, SIBOR is not true indicator of its cost of funds.  The spread on their SIBOR loans, though lower than that of DMR, is really not the full profit that the banks make.

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements.  Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
View all posts by Darren Goh

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