FIXED VS DEPOSIT MORTGAGE RATE (OCBC 36FDMR)
This projection is based on MortgageWise‘s own forecast on the pace of interest rate hikes on both the benchmark 3-month SIBOR, which follows after that of the federal funds rate in the US, and that of deposit mortgage rate (using OCBC 36FDMR here).
The following assumptions are made:
- US Fed will hike rates 2 rounds per year at 0.25% each time from 2016 to 2018, and the pace quickens to that typically of a normal interest upswing cycle at 4 rounds per year or total 1% p.a. from 2019 to 2020.
- 3-month SIBOR will follow exactly this same pace of increases as exemplified by the slightly steeper purple line after 2018.
- Deposit mortgage rate are by definition less volatile and lag behind SIBOR hence OCBC 36FDMR (red line) increases each time by only 0.20% and the bank will do 2 rounds of increases for 2016 (due to rising NPL or non-performing loans) but slows to 1 round from 2017-2018 but gathers pace back to 2 rounds per year from 2019-2020.
- 3-year fixed rate is used for comparison here which will rise at pace of 0.30% each time SIBOR increases by 0.25% based on our general observation in the past 1 year (It stays consistently around 0.80 to 1.20% above 3M-SIBOR)
- Homeowners can always refinance to another home loan based on deposit mortgage rate (DBS FHR18, OCBC 36FDMR) after 3 years when the promotional spread ends and gets reverted to a higher spread from year 4 onwards. We will assume new promotional spreads to always stay at 1.25 above the peg represented by the orange line (on 36FDMR)
Based on our projected pace of rate hikes, homeowners enjoy the most interest savings when they choose to lock down fixed rat for the longest period of 3 years or above as evident by the much bigger orange area (additional interest payable on deposit mortgage rate) over the dark green area (the initial extra interest paid going on fixed rate), over a period of 3 years.
Of course one may argue that should homeowners decide not to sell the property after 3 years, he will need to refinance at much higher prevailing fixed rates by 2019 (which would be above SIBOR the purple line). However remember there is still the option of switching to prevailing rate for new deposit mortgage loans (orange line) in 2019. What is certain then is that homeowners would have saved the most on interest over the next 3 years. As the orange area is visibly at least 4 times the size of the dark green, the savings is likely quite substantial unlike a 2-year fixed rate where the costs of refinancing on smaller loans might outweigh any savings from such a move.
Speak to our consultants today on whether you should refinance to fixed rate or deposit mortgage rate as considerations vary depending on one’s objective and circumstances but generally we look into at least 5 factors:
- Holding period of the underlying property
- Owner-occupied vs investment property (and if one meets TDSR and the implications for refinancing)
- Size of outstanding loan
- Transaction costs involved
- Ability to repay the loan after the fixed term ends
There are other factors to consider as well. Speak to us today.