FIXED VS DEPOSIT MORTGAGE RATE (DBS FHR18)
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 peg (using DBS FHR18 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 peg are by definition less volatile and lag behind SIBOR hence DBS FHR18 (black 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.
- 2-year fixed rate, being the lowest, will be used for comparison here which will rise at pace of 0.20-0.30% which 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 pegs (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 FHR18)
Based on our projected pace of rate hikes, contrary to popular belief, homeowners who employ a 2-year fixed-and-renew strategy end up paying (possibly 3 times) more interest over a four year period as evident by the much bigger dark green area over the orange area. In fact the interest payable on fixed loads up even more as rate hike gathers pace from 2019 onwards.
Also depending on the size of one’s outstanding home loan, the savings (orange area) over the next 2 years by locking down fixed rates might be wiped out by transaction costs involved for refinancing which typically come up to $2700-$3000 including legal and valuation fees.
Speak to our consultants today on whether you should refinance to fixed rate or deposit mortgage peg 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.