Of late, with the slide in SIBOR and SOR post-Brexit, we have been hearing remarks like “DMRs are like petrol prices, so fast to move up the moment oil price surges, but when the price of oil falls, they never come down at all!”. True indeed petroleum companies will always cite rising overheads to justify against a corresponding drop in pump prices.
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First what are DMR or Deposit Mortgage Rates? These are essentially a new class of mortgage pegs first made popular by DBS, where the mortgage interest one pays is pegged to one of the published deposit rate designated by the bank, instead of the usual market-driven SIBOR rates. In the case of DBS, the peg chosen is that of its 18-month Sing dollar fixed deposit rate for amounts between S$1,000-9,999, named FHR18. Since the launch by DBS back in 2014, a few other banks have launched their own version of DMR namely – OCBC’s 36FDMR, UOB’s 36FDPR and the latest being SCB’s 48FDR. As the name implies, these are all pegged to the respective bank’s fixed deposit for 36 and 48 month Sing dollar fixed deposit based on the defined deposit band. Last year after US Fed raised its federal funds rate in a historical rate hike in almost a decade, DBS raised its FHR18 for the first time from 0.50% to 0.60% just a week later on 23 Dec. As its 18-month fixed deposit interest at 0.60% is so close to OCBC’s and UOB’s 36-month fixed deposit interest at 0.65%, we have been speculatively the latter to move up next possibly sometime by 2ndhalf of 2016. That does not look likely now with sudden plunge in cost of funds.
Those views were before the Brexit vote on 23 Jun 2016. As rates were on the rise then, though temporarily disrupted by weak job numbers in the month of May, we were of the view that during such an interest uptick cycle, homeowners are better off on either a fixed rate mortgage or one that is on DMR as opposed to SIBOR home loans which will be the first to move up. There was a sea change post-Brexit, an event that no one has expected. In the weeks that followed, bond yields drop to such levels that signal the earliest rate hike could come only sometime in 2018! In Singapore, interbank rates dropped back further with 3-month SIBOR coming off from approximately 1.00 to 0.87, and 1-month SIBOR touching 0.63.
Here at MortgageWise, we decided to suspend giving any forecast on rates for 6 months until the dust settles on Brexit and after the US Presidential elections. The position we now take is to stay nimble – go on shorter 2-year fixed rate home loans if one wishes, and for those with bigger loans, maybe even consider going on SIBOR loans for the time being as long as there is no lock-in or minimal lock-in like 1 year.
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What prompted the change? First we decided no one, not even the US Fed, knows what to expect next, especially if Euro crisis is to come back within the next 6 months or in 2017 leading to a breaking up of European Union. No one is able to put a handle on how rates will move. Believe no analysts or experts whose views can swing widely from rate hike off the table for 2016, to 30% odds of a rate hike in Dec, to the now 50% chance that Fed will move in Dec, following strong showing of economic data from the US in recent months.
Without the ability to forecast rate movements, it becomes rather difficult for homeowners to decide for example if it makes sense to switch from DMR loans back to SIBOR packages just so to capitalize on the low spreads and luring headline rates for year 1 at the moment, some from as low as 1.14%! Right now it would seem that those who got the bandwagon for DMR loans earlier in the year or last year, when rates were rising, are paying higher interest now averaging 1.60% to 1.80%. For those without lock-in, they could easily now switch back to SIBOR packages and reap a savings of almost 40 to 50 basis points, which translates into a savings of $2,800 in a year on a typical outstanding loan of $700,000 (using simple straight-line calculations of 0.40% on $700,000 which overstates the savings somewhat compared to amortization basis).
The real problem is in guessing when will SIBOR move back up again to render the whole exercise futile? For example, if US Fed indeed starts hiking rates by 25 basis points in Dec, and 1-month SIBOR move back up to 0.85 from the current 0.63, even on the lowest spread SIBOR package now at 0.65% in the 1styear, that works out to a final interest rate of 1.50%. There is still savings though if one is on DMR interest of 1.80% today. That is the reason why we think it still make sense for bigger loans. However, be prepared, should US Fed hikes rate again by middle of 2017, the interest would go back up to 1.80%. At the very least, one would have enjoyed interest savings of at least 9 months to a year from the point the loan ports over to the new bank after a 3-month notice to refinance. So for those who are keen to do this, there is a need to act quickly. Speak to our consultants today to assess if it makes sense for such a move.
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There will be no need to go through this remortgaging process so soon, if lenders are to adjust their DMR pegs down by 0.20% in response to a corresponding drop in SIBOR post-Brexit. We do not see that happening anytime soon. Not when you have the 3 local banks now feeling the heat from a possible fallout of their oil & gas exposure following the Swiber episode.
In an interest upswing cycle earlier before Brexit, DMR is the preferred or recommended mortgage peg which lags behind any increase in SIBOR hence it is less volatile and more stable. The converse is true when rates start to come down – SIBOR will drop first! To be fair to lenders, they cannot be moving their DMR up and down rapidly in response to any short-term changes in SIBOR, that is not the nature of how DMR is supposed to work. But they do need to monitor the macro environment and if softness in rates persist into 2017 they might seriously need to review the value of the peg.
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 and the creditable distributor of mortgage products for banks and financial institutions in Singapore.