HDB fixed rate home loan for refinancing

Making Sense Of DMR Home Loans

Last month in May, StanChart became the first foreign bank to launch its own Deposit Mortgage Rate (DMR) loan, following behind the footsteps of the three local banks which have now put in place their own DMR pegs in the past year. They go by different names but the nature of this new class of mortgage pegs remains – instead of pegging one’s mortgage rate traditionally to that of either SIBOR or the lender’s internal BOARD rate for home loans, one can now choose to peg it to DMR which is a deposit rate that is defined by the lender. For now this deposit rate seems to centre on published board rate for SGD Fixed Deposit (FD) of various tenures but there is nothing to stop lenders from choosing for example an existing or new savings account deposit rate to be its DMR.

Let us take an overview of the 4 banks in Singapore that has rolled out DMR mortgages:

DMR home loans comparison

Finding the right home loan has certainly become a lot more complicated these days, not just because of rigorous requirements brought about by the TDSR framework put in place since 2013, but the myriad of mortgage types and features available in the market. We have yet to even discuss the pros and cons of going with traditional SIBOR packages (which has even lower nominal rates than DMR loans now due to the recent slight in interest), over that of DMR packages. Putting that aside which can be topic for a separate discussion altogether, how does one choose the right DMR home loan for the next new purchase or refinancing of an existing mortgage?

 

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Generally most clients would decide based on the nominal rate – 1.65% being the lowest of the lot, and the no of years lock-in which represents risk as DMRs are new and no one can predict for sure how the banks will manouvre its defined DMR going forward, although we have been arguing for some time now that DMR being deposit rates should be more stable and less volatile (swings from top to bottom) through all business cycles as seen in our 30-year historical chart (based on MAS statistics for 12M FD in Singapore). Is nominal rate the best way to decide? What about the choice of the underlying DMR peg?

One question we have received of late is: Why is SCB’s 48-month FD rate at 0.50% whereas DBS 18-month is at 0.60 and 36-month FD for the other 2 local banks is also higher at 0.65? Aren’t foreign banks supposed to have higher FD rates as local banks are flushed with SGD funds? And we have also pointed out in earlier article if you go look up DBS FD rates on its website, the longest tenure offered is 24-month and at 1% p.a.!

How do you make sense of all that? Which DMR has highest propensity to move up when the benchmark cost of funds rate (3M SIBOR) move up? And do all of them move up at the same time and by somewhat the same proportion of sorts. This is the difficult part to answer, as it involves the various banks’ Treasuries or funding strategy, which is a “black box” to us, and I like to believe they are also dynamic in nature.

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Perhaps the best response a homeowner can take is to first try not to lock oneself into a DMR home loan or at least go with one that has the shortest lock-in at a reasonably-attractive nominal rate. To be fair it is always a tradeoff, the bank that wants to lock you in must offer you a rate that is attractive enough to justify giving up this flexibility of switching banks. One will always lose bargaining power in negotiating for good repricing rates if one is locked in.

Next instead of trying to explain or predict how one bank will move its DMR against 3M SIBOR or another bank, we like to offer our view that the only viable basis for decision here is to monitor closely the 3 local banks’ DMR, their correlation with one another going forward, and how they move in tandem with movements in SIBOR. In particular DBS being the local bank with the largest SGD deposit base, sets the tone for the rest of the market. We know DBS has adjusted its FHR18 once last December when US Fed hiked rate for the 1st time in a decade, whereas the other 2 local banks have yet to follow. We will be tracking any movements on DMR, or more importantly the gap between DMR and SIBOR, very closely. And to this end, it certainly pays that one works with a trusted mortgage consultancy firm over the long haul, as we can provide this information at any point in time (later on) to aid in client’s decision process.

In fact we do have what we call an “Adjusted-DMR” comparison chart which we put together after studying the 3 local banks’ SGD FD rates over the last 12 months. We put in certain assumptions on the 3 banks’ funding strategies and on the time lapse after one makes a move on deposit rates. We believe this gives a better perspective as certainly no one likes to make a decision on nominal rates per se, and be given a rude shock when his loan ports over to the new bank followed by an immediate increase in its DMR. However we hesitate to publish this “Adjusted-DMR Model” as our assumptions need more time to be validated and at this moment our framework remains more subjective than objective. Our consultants can only release this model selectively on a request basis.  Speak to us today.

For foreign banks rolling out DMR, we maintain our view that the best way to do this is not to define DMR on FD rates, unlike local banks. Our reasoning – the market perception is that foreign banks should have higher cost of funds for SGD with more limited branch network. Let us be honest, no one in the right frame of mind will walk in to place a 48-month or 36-month FD at such low rates today. Perception is real. A better way for foreign banks to make a bigger impact with DMR home loan is to peg it to a special savings account interest which will serve as a deliberate deposit strategy. Already the 3 local banks have launched their own versions of a “bundled” savings account product where it pays much higher deposit interest up to a certain amount usually S$50,000, when one also uses the bank’s credit card, buys an investment product, takes up a home loan, or credits one’s salary to this account. Yes I am referring to DBS’s Multiplier Account, OCBC’s 360 Account and UOB’s One Account. If a foreign bank pegs its home loan interest to such a deposit account, not only will it be able to draw in deposits (when interst is set correctly at a level below FD promotional rates) and build stickiness to its brand, it lends more credibility as a DMR mortgage peg which will at the same time help to pull in more loans, scoring a double-win.

Since 2014, MortgageWise.sg 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. See their testimonials.

 

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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.
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