This week OCBC made the market sit up with a significant move by replacing their existing FDR and BOARD rate home loans with a brand new mortgage peg called OHR which stands for OCBC Home Rate.
As thought leader in the mortgage space, we need to give our take on it and our initial assessment is that it can be quite an exciting new peg for the Singapore market if it lives up to its promise of benchmarking on the long-term average of the 1-month and 3-month SIBOR. In fact, we think it embodies the best in SIBOR and the best in the popular FDR home loan peg. Let me explain but first let us present what are the new packages the bank has unveiled at the same time:
We will explain OHR shortly. First notice there is a fixed rate package from OCBC this time, a bank which has shied away from competing on fixed rates in recent years. That is good news for the market with more entrants of fixed rate home loan players. The bank fixed the rate for the first two years by contracting that it will not move OHR during this period, or what they call OHR Fixed. What is more interesting to us is the floating rate package at 1.35 for the first two years, and even if you include the year 3 rate of 1.40 that gives an average of 1.37 over the first three years (coinciding with the legal fee clawback period for refinancing cases) which will make it one of the lowest in the market for floating rate housing loans. This would be especially attractive to those with bigger loans like above $1m, especially if OHR remains very stable in the long term.
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The big question on most people’s minds now would be – just how stable would OHR be? Or is it just another BOARD rate. The bank provides the long-term trending of 1-month and 3-month SIBOR over the past 12 years and gives an indication of how it would benchmark OHR going forward:
Based on the average of 1-month SIBOR and 3-month SIBOR over the last 12 years at 1.0728 and 1.1990 respectively, the bank decides to start OHR off at the lower end of 1.00, instead of 1.10. Obviously for pricing sake, it needs to be a rounded figure instead of actual averages. That is understandable. We think the bank is being fair and transparent.
Now let us answer the three most common questions we get on OHR from clients.
1. Is There A Preset Formula For Determining OHR?
We think there is no preset formula now, but the bank has given quite a good indication of how it would benchmark OHR based on the long-term averages of 1-month and 3-month SIBOR. Will it always take the lower end of the 12-year average? We do not know yet, but we believe it will be close. To create greater confidence in OHR we hope the bank would release such averages on a regular basis, and detail how each adjustment is made.
2. What Is The Difference Between OHR and BOARD rate?
Notwithstanding the fact that both OHR and BOARD are soley determined by the bank, there is some differences. We think the biggest difference is that bank has given an indication and a commitment on how it would benchmark OHR against what is transparent to the market – SIBOR rates in Singapore. Whereas when it comes to internal BOARD rates, no one really knows how many times the bank will move the rate in a year and by how much.
Another important difference is this – as there is only one set of historical values for 1-month SIBOR and 3-month SIBOR to average out, technically-speaking there should only be one single OHR, unlike BOARD where there could be many tranches within the same bank. We expect OHR to be singular and only the spreads would vary over time for new versus existing customers, as interest rate rises and falls in Singapore. However, we need to monitor this closely going forward based on the collective feedback from all our clients over time. To this end, it will make sense for you to take your loan through MortgageWise as you join the family here, where we will share with you the latest trends and analysis to help you make the most informed decision. Speak to our consultants today on OHR and more.
3. Is OHR Worth Considering?
We think yes. This is OCBC, one of the big three banks in Singapore. And for the bank to stake its entire mortgage portfolio on SIBOR and OHR home loans going forward, it run the risks of a huge exodus of loan customers if it mismanages OHR.
The 12-year averaging effect is what we give our thumbs up to. If you look at the graph again, there is a long period of seven years between 2009 and 2015 where SIBOR stays in the trough of 0.40 to 0.50. This means that for OHR to rise, it would take quite a while from here and quite a spike as well due to the averaging effect. That is not going to happen any time soon given the expected slow and gradual rise in interest rates. Even when the bank finally adjusts OHR due to rising long-term averages of SIBOR, we expect most to be out of the lockin period two years.
This long-term avergaging effect gives OHR the stability of a FDR home loan (fixed deposit rate home loan), and benchmarking on SIBOR gives it that transparency of a market-determined loan peg, provided the bank keep to its promise. This is what we meant when we say OHR captures the best of what you have in FDR (stability) and SIBOR (transparency). It would be even more perfect if the bank would look into a preset formula for OHR and publishes that on a monthly or yearly basis but that is the bank’s prerogative.
We applaud the bank’s innovation here in introducing yet another alternative to the Singapore mortgage market, keeping it vibrant and competitive which can only be good a thing for homeowners as interest rate rises. Speak to our consultants today to find out more options for your home loan refinancing or enjoy a special purchase legal fee privilege of $1,800 all-in through us, if you are buying a private property soon.
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.
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