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OHR Is Not 12-Year Moving Average

OCBC made a bold move away from FDR (fixed deposit rate) home loans back in September 2017 by replacing them with its unique OHR (OCBC Home Rate) mortgage peg which was first reported in this blog.

Six months later, OHR has remained at its launched value of 1.00% and it has also remained a singular peg across the board for all OCBC home loans, compared to FDR home loans in the market which has mushroomed into more than a dozen FD tranches from 8M, 9M, 14M, 24M, 36M and so on from the various lenders.  It becomes harder for the average homeowner to keep track of the duration of each FD tranche and hence how likely the bank will next adjust the peg.

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This article serves as an update to our introduction of OHR which is still a fairly new mortgage peg in the market.  Before that we also need to recap the short history of FDR home loans.  DBS pioneered the latter in 2014 as a unique category of home loan pegs in Singapore where mortgages are no longer tied to a traditional lending rate like SIBOR, SOR or BOARD rate, but instead to one of its pre-designated fixed deposit tranche interest rate published on its website daily.  The attraction is that deposit rates are cost of funds to the banks and no lender will want to raise it frequently or frivously.  However, as thought leader in the industry, we have forewarned right from outset that cost structures vary from bank to bank and some may be more likely to hike FDR than others.  Since then five other major mortgage players (in the order of OCBC, UOB, SCB, MAYBANK and HSBC) have rolled out their own versions of FDR home loans.

OCBC introduced OHR as a new mortgage peg that “does not fluctuate with short-term interest rates”.  Even though it presented a 12-year historical chart on the average 1-month and 3-month SIBOR at its launch and in its subsequent sales pitch to clients, there is no pre-set formula given as to how the bank will determine the value of OHR.  The bank has reminded just last month that OHR shoud not be marketed as a moving 12-year average of 1-month and 3-month SIBOR.

So, what is the performance of OHR to-date?  Based on our anecdotal evidence, overall the market has largely taken to OHR warmly as a trusted mortgage peg from one of the three well-known local banks in Singapore who will have too much to lose should it mismanage this peg.  This means the bank not keeping to its promise of a peg that “does not fluctuate with short term interest rates”.

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Now we need to be clear here – the bank did not commit that OHR will never move, just that it will not move in accordance with short term movements in interest rates.  I will interpret this to mean that when the bank decides to hike OHR eventually, it will first take a look at what is the average long-term trendline of 1-month and 3-month SIBOR be it based on 5-year, 10-year or 12-year, or even longer, and not the average increase of SIBOR over the last 3 months to a year.

If you look at how much 3-month SIBOR has moved in the past one year from 0.99% exactly one year ago in May 2017 to the current 1.50%, that is a movement of 0.50%.  In the past two months, five other banks have adjusted their FDR loan pegs as a result of this steady rise in benchmark interest rate, which we discussed and summarized in an earlier article.  In our opinion the recent round of hikes is justified as it comes so much more later which is in keeping with the definition of FDR – a delayed or laggard peg to SIBOR.

In fact, homeowners can draw confidence that OCBC is the only bank that has yet to hike its longest-standing FDR tranche of 36FDMR which was launched on 29 Oct 2015 and replaced with 48FDMR only by April 2017 – a total of 17 months or 1½ years’ worth of mortgage books signed.  We were surprised the bank chose not to increase 36FDMR tranche in the latest hikes which means those who were signed onto OCBC floating rate packages as far back as end-2015 were effectively on “fixed” rates for almost two years and still counting.

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It follows then that before the bank will make any move on OHR which by definition is not to fluctuate with any short-term rate movements, it would have to first hike its 36FDMR.  We will be hoping that the two events do not happen at the same time and the bank will only hike OHR two years later as SIBOR continues on its current trajectory.  This would then make OHR the next best mortgage peg to a fixed rate home loan in the current enviornment where everyone is scuffling for the lowest fixed rates.

Finally, some disclaimer to put out.  We do not presume to know exactly how banks really operate and they could hike OHR or FDR sooner rather than later.  The views presented here remain largely opinions which may or may not borne out.  We just want to provide an alternative to fixed rates especially for those with a bigger loan quantum and who would rather take a bet on a lower floating rate for immediate savings.  Pick your bet wisely.

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.

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