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FDR Still Good After Recent Increase?

We are the first to report on our blog that DBS has hiked its FHR18 mortgage peg on 1 Feb 2018 from 0.60% to 0.80%. Since then, four other lenders with FDR home loans have subsequently announced hikes in selected FDR tranches as we have expected, with OCBC and UOB home loans being the last two affected after the CNY break.  This widespread increment is due to a “pent-up” pressure on the part of lenders who have held on to low deposit rates for a long time in the midst of a rising SIBOR over the past year (3-month SIBOR touched a high of 1.37 as at 1 March).  In fact, the last hike in FDR happened more than two years ago back in December 2015.  It was a long overdue move.

We summarize below the latest round of FDR rate hikes at-one-glance:

BankFDR Peg*Date*Old RateNew RateIncrease By
DBSFHR181 Feb0.600.800.20
SCB48FDR6 Feb0.500.900.40
MAYBANKFDMR3610 Feb1.201.400.20
1 Mar0.25
UOB36FDPR5 Mar0.651.000.35

* Note: This is the date of announcement as we understand, not the effective date as banks need to give a notice of 1 month before making any adjustments.  Also, not all the FD tranches are adjusted, for example DBS hiked only deposit rates for 18-month whereas OCBC did not hike that for 36-month.  We only tabulate here those tranches affected.

For those affected, some would have received the notification letters by now or some have yet to open their mails.  Cold comfort to some, still it is good to understand that indeed the broad market has moved up and this is the first major round of increases on FDR pegs across-the-boardin the industry.  It will not be the last one for sure, depending on the speed at how SIBOR moves up in the next few years.  Or will it just hit a certain level and plateau.  And to be fair, most clients who signed on to floating rate packages in the past year probably balked at paying extra for the higher fixed rates at the point of application, especially when the direction of interest rate movements were still unclear then.  They would also have enjoyed moderate to substantial savings on floating rate in the past year depending on the package signed.

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With the strong pickup in interest rates in US, does this mark the end of FDR home loans after this recent experience of rate hikes by many?  Hardly.  I think we need to put things in perspective and in fact, so far the banks have largely kept to what an FDR home loan promise to be.  It is timely to re-visit the tenets why we picked FDR as a more preferred home loan peg over the traditional SIBOR ever since 2015 – when interest rate cycles begin to trend up.

1. FDR Is A More Stable And Less Volatile Mortgage Peg

SIBOR (3-month) has been volatile lately but the fundamental trending has been an increase from 0.87-0.99% level since 2016 to 1.20-1.50% level this year, that’s approximately a climb of 30-50 basis points in two years.  More significantly US Fed has hiked four more times since that historical first rate hike in a decade back in Dec 2015 and the US Fed funds rate has risen from 0% to 0.25% in 2015 to the current 1.25% to 1.50%.  But banks here have taken a long time to level up with SIBOR – we actually expected them to respond by mid of 2017 but our call was wrong.  They waited almost two years and four more Fed hikes later before they made the first major increase in deposit rates – and with an average increase of 20-40 basis points.  The next round of increases will not take so long though.

2. FDR Is Highly-Visible (Published Online) And Subject To Scrutiny

I am sure we are not the only mortgage blog that talks about this recent hike.  As FDRs are essentially “Fixed Deposit Board Rates” which are published on the banks’ website daily and open for scrutiny, banks will need to calibrate every adjustment carefully.  This is in stark constrast to the traditional BOARD lending rate which is opaque and internal to the bank which makes it hard for the market to monitor.

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3. FDR Can Have Cost Implications For Lenders When They Hike

This is the biggest selling point touted by banks when FDR was launched.  We have however repeatedly caution that fixed deposits can form only a small part of the overall funding base of selected banks, depending on the FD tranches selected, local vs foreign bank funding structure, etc. In short, lenders may benefit more when they hike deposit rates than you think would cost them in terms of hainv to pay higher interests to depositors.  Simply because deposit rates are no longer just cost of funds to the banks, but a lever to raise interest margin.  Like what they always say, banks will not lose money.

This third argument for FDR is what we are not too convinced right from day one, if you have been following this blog.  Now that banks have rolled out so many tranches of FDR, it becomes even more difficult for the market to keep track of the no of times and magnitude of each increment.  Still, the laggard effect to SIBOR increase and the visibility of FDR pegs far outweigh the negatives.  And this recent round of FDR increment proves that lenders have been responsible thus far in terms of playing catch up with SIBOR.  In fact, some lenders have deliberately chosen to hold back increment for tranches like OCBC home loan‘s 36-month and DBS home loan‘s FHR (ave of 12 & 24-month) which we were little surprised as these tranches would have substantial mortgage sign-ups.

The choice remains clear between SIBOR and FDR home loans – the latter is the way forward when interest goes on an upswing over the next few years (not forgetting we do have another alternative altogether in OHR which the bank claimed it will not fluctuate with short term rates).  I guess the dissonance some homeowners felt when receiving letters on the impending adjustment of their FDR peg is not so much a result of choosing FDR home loans, but that between fixed rate and floating rate FDR home loans.  One needs to make a clear distinction here.  To go fixed or floating is a whole different topic of discusson and to that we have always highlighted there are at least six factors to consider before one makes a decision.  Stay tuned to this blog as we revisit some of these considerations or speak to our consultants now for a quick decision before rate rises further.

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And one of those six factors has to do with the gap between fixed and floating rate which is currently still at an all-time narrowest range of 0.15% (between the lowest FDR floating rate of 1.60% and the lowest fixed rate of average 1.75%).  That is an obvious enough hint.  Why such a close gap? Beats me.  Lenders are still very much willing to keep their floating rates at the same level as previous month, but more and more are now moving to increase their fixed rates.  We are just waiting for that last one or two banks to close off their current tranche of fixed rate promos and we will off to a higher prevailing level for fixed.  All depends on the movement of SIBOR (3-month) from here.  We will see how that plays out.

Some people might realize, after this recent episode of FDR hikes, that they could use the service of a professional mortgage broker who does all the tracking of different FDR tranches from the various banks on a full-time basis.  Having a dedicated mortgage partner who call as early as 6 months ahead of renewal time or lock-in expiry date takes on greater significance as interest cycle turns upwards over the next few years.  Work with established players with the expertise, system capability, accurate rates information, and sometimes access to certain deviated rates or special promo terms.  This is what we do here at MortgageWise for our clients as we seek to work with you long term.  So, for the best home loan in Singapore, speak to our consultants today.

Since 2014, has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.

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