choosing the right mortgage pegs

Quick To Rise But Slow To Fall

Sounds like transport fares? Or electricity tariffs? Petrol prices? What about mortgage interest rates? 

The same is observed when it comes to movements of mortgage loan pegs.  These are used to adjust interest rate for home loans.  In Singapore, there are generally three types of pegs – SIBOR, BOARD or FDR (fixed deposit rate home loans).  The last is made famous by DBS home loans (called FHR) and only three banks offer FDR home loans now.

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When US Fed hiked rates nine times over the last three years (2016 to 2018), banks here have responded in tandem.  In fact, DBS increased both its original FHR and FHR18 immediately a week after the first historical rate hike by US Fed in a decade (23 Dec 2015).  However, the path of SIBOR (the benchmark interest rate here in Singapore) did not go up in a straight line (see chart below).  It first rose in 2016 but then dropped back and see-saw before finally picking up momentum two years later in 2018.  3-month SIBOR rose from 1.12% at the start of 2018 to end the year at 1.88% when US Fed did four consecutive hikes in the same period.  During this time, the main bulk of rate increases by banks followed swiftly.  Most mortgage loan pegs be it BOARD or FDR rose over 1% in total (more than the increase in SIBOR) over multiple rounds of adjustments.  We tracked all these rate increments in this blog.

Now that US Fed has made a policy U-turn in March 2019 followed by three rounds of rate cut, we will be waiting for the reverse to happen.  Not yet.  Not so fast.

Even SIBOR itself is taking its time to come off.  After hitting peak of 2%, 3-month SIBOR tapered off after the 1st rate cut by US Fed in July this year but hovered at 1.87% for long periods since.  It finally started moving down again in October to 1.82% and in recent weeks to 1.76%.  Still the total drop of 25 basis points is fairly slow and insignificant when US Fed has already cut 75 basis points during this time.  We are unable to explain this.  It could perhaps signal there may be more “catching up” to do, ie. expect further drops.  1-month SIBOR has dropped to 1.73% as of 14 Nov.

What about BOARD and FDR mortgage pegs?  Well, no prize for guessing that. We think it might take at least a year before we see any adjustments from any banks. There would mean 2nd half of 2020.  There may be some incentive for banks to adjust down FDR as they do save on paying lower deposit rates.  But not much really.  They will lose more in interest margin on the much bigger loan books if they do that.  It calls for a balancing act or portfolio management.  As for BOARD rate (a pure lending rate), there is totally no incentive for any lenders to want to adjust that down.  Unless they are put under pressure to do so.  Unlikely.  That’s also the reason why we never like to recommend BOARD rate as a mortgage peg.

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In August, Singapore government announced it is awarding up to five digital bank licences – 2 for DFB (digital full bank) and 3 for DWB (digital wholesale bank).  We always prefer a free market.  It is my hope that the two DFB licences will be won by non-traditional banks or consortiums formed by banks.  To be a true financial hub for South Asia, we need more innovative solutions.  I dare say this – any lender, digitial or otherwise, will take the mortgage market by storm if it launches a home loan that’s pegged directly to the US Fed funds rate!  Why not?  If all mortgage loan pegs in Singapore rise so quickly following a US Fed hike, but the reverse is not true, it certainly makes sense to peg one’s interest rate to the source directly.  That would be the most ideal mortgage loan peg.  We hope for it.

Speaking of source – the US Fed funds rate.  That’s the key driver for interest rate in Singapore over the past 30 years. This close correlation is borne out on the charts.  Singapore does not have a central bank’s rate that it uses to set monetary policy as its economy is simply too small.  Much of the central bank’s action revolves around managing of the sing dollar exchange rate against a basket of trading currencies.

Understanding this is important when it comes to planning mortgages.  We are often asked – will rates go up or down from here?  Is it ok to sign fixed rates at 1.80%+ range as it is still dropping? Where’s the floor? 

No one can tell you for sure which way rates will go in 2020 including the Fed chair Jerome Powell himself.  Anyone who professes to know that is lying.  Look.  Even the Fed never expect it would do four hikes in 2018 only to undo almost all of it except for one, barely one year later.  Incidentally, the market is still expecting at least one more cut in 2020.

What we can tell you with some degree of certainty is this – so long there is pressure for Fed to cut rates going forward or pause, there is no chance for SIBOR or any prevailing rates to go up.  The trend is definitely still pointing south.  It can go sideways but not up.  That’s the key reason why we’ve advocated going on floating rates since the start of 2019 when US Fed did an U-turn.  And until such time someone does launch that perfect mortgage loan peg – indexing to Fed funds rate, the next best alternative would still be SIBOR.  At the very least, it is coming down.

What about fixed rates?  Yes, you guessed right.  As long as SIBOR is going down, fixed rates will continue to drop as banks are out to compete for new businesses.  Thanks once again to free market.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, or to buy your next Singapore condo, speak to our dedicated team of mortgage consultants here for the best home loan rates.

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