With the recent spate of rate hikes to FDR (fixed deposit rate) home loan pegs since the start of the year (see our reports in this blog), has FDR lose some of its lustre as a more stable and preferred mortgage peg amongst homeowners in Singapore? Not exactly.
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Naturally, the emotional response to any rate hikes is to baulk at it and cry foul. However, as the recent increases this year are across-the-board with total of 5 banks moving up their various tranches of FDR (the only bank yet to make a move on its FDR is HSBC), most homeowners have come to accept the increase as broad-based and market-driven. It is because the prevailing interest rate characterized by SIBOR has gone up first and banks are now simply playing catchup. Unless one is locked down on a fixed rate, it will not be fair to expect floating rates to behave like fixed rates if the benchmark interest rate 3-month SIBOR has moved back up from 1.12% to 1.50% in the last 6 months.
Before we go on, we need to give a brief history of what is FDR home loans.
What Is FDR Home Loans And How Does It Work?
This could likely be a uniquely-Singapore innovation in the mortgage industry first introduced by DBS in Jun 2014 when it started pegging its home loans to a chosen fixed deposit rate tranche (average of the 12-month and 24-month fixed deposit rate for deposits in the band $1,000 to $9,999) and named its peg FHR (Fixed Deposit Home Rate). Though initially shrugged off by its peers in the industry, it has taken the market by storm and by 2015 all the major mortgage lenders have rolled out their own version of what we refer to collectively as FDR or “fixed deposit rate” home loans – in the order of OCBC, SCB, UOB, MAYBANK and finally HSBC which was the last to launch its 24TDMR (pegged to 24-month fixed deposit) last December in 2017.
How FDR home loan works is that, instead of pegging mortgage interest traditionally to 1-month or 3-month SIBOR which fluatuates on a daily basis as determined by demand and supply forces in the money market, the interest is pegged to a published deposit rate for a particular tranche of fixed deposit as defined by the respective bank. For example, the latest FDR tranche to be introduced to the market is StanChart’s 36FDR pegged to its 36-month fixed deposit rate, currently at 0.72%. This rate will change once banks revise its deposit rates like what happened earlier in the year, and the bank will give a one month’s notice in writing before actually moving up the mortage interest rate.
How Does It Compare To Other Mortgage Pegs?
Generally, there are three types of mortgage pegs in the Singapore market which are neatly summarized in the chart below:
All the eight major mortgage lenders in the market offer SIBOR home loans but only four offer FDR home loans after OCBC replaced its FDR with OHR (OCBC Home Rate) last October. The latter is somewhat of a BOARD rate except that the bank has indicated that it will take reference on the long-term average of SIBOR, but stop short of giving a pre-defined formula for how OHR will be calculated or set.
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How Has FDR Moved Historically So Far?
As banks tend to “close out” a tranche of FDR after it has signed up a good number of mortgage accounts pegged to it, before “opening” a new tranche on a whole different FD tenure, over time it becomes difficult for the market to track the historical patterns. Not unless you choose to work with a professional mortgage consultant.
At MortgageWise.sg, this is one of the value-add we provide to clients as we monitor very closely all FDR tranches released and closed off by the respective lenders. To give you an overview, we present here the 5-year historical trendings of the “initial-launched” tranche of FDR from each bank, as that would give the longest history of its correlation with 3-month SIBOR. Newly-launched or tranches currently in offer will not give any meaningful insights as we will not see any increases yet.
If you like to see the mapping out of all FDR tranches within the same bank, just ask our consultants for it as it is almost impossible to map out over a dozen tranches on the same chart. Better yet, work with us long-term as your trusted mortgage broker and you can access the most accurate mortgage information, along with the latest rates (including special deviated rates from time to time) whenever you like to do a review.
As you can see from the chart, the long-term trending of SIBOR (3-month) is a gradual uptrend in the last 5 years but with a period of softness in the last two years. That has changed in the final months of 2017 with a strong pickup in rates followed by a V-shape pattern. We are expecting the longer term trendline to continue with 2 more hikes by US Fed this year and 3 more next year. Initial-launched FDRs have remained stable for long periods and the broad-based hikes earlier this year is well justified reflecting the strong pick up in interest rate over the last few months.
Conclusion on FDR Home Loan
On the whole, lenders have largely kept to their side of the deal where they would calibrate carefully each hike on FDR to follow only after the increase in SIBOR. You can see from the chart that the recent run-up in SIBOR (3-month) started around October 2016 and it took 1.5 years for SIBOR to move up roughly 40 basis points (from average 0.90% to 1.30% in the period), whereas the broad-based reaction from lenders come as a laggard and some tranches the increase was half of 0.40% (read our other report).
Hence, we maintain our stance that in an environment of rising rates, SIBOR would be the first to move up and FDR will continue to be a laggard mortgage peg. For those who use the service of a professional mortgage broker, this laggard effect could be further enhanced by targeting the correct FDR tranche in the market at time of loan application.
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That brings me to another point which I like to make as I read some blogs out there propagating the idea that longer-tenure FDR tranches make a better choice as it comes with “lower spreads”, or that shorter-tenure FDR tranches have more room to go up as they start from a lower base. As there are different cost structures amongst different banks with local banks having access to the largest pool of Sing dollar funding than their foreign peers, it is hard to decipher which deposit tranche will go up more than the rest. Also, no one really walks into a bank to place fixed deposit for a 36-month tenure, will you? So logically with a smaller base of deposit accounts on longer-tenures, such FDRs will tend to exhibit more the nature of a mortgage-lending rate than that of a deposit-funding rate to the bank.
The truth is no one really knows how banks would manage the various deposit tranches going forward as they also act as a lever for banks to raise interest margin with the concept of FDR. Some banks may also decide to meaningfully hold back the increase for certain tranches for strategic or competitive reasons. Case in point – OCBC raised all its FDR tranches in March this year except for its 36-month FDMR, which come as a pleasant surprise for some.
By keeping watch and monitoring closely FDR movements in the market against SIBOR, we do offer our own assessment on what we believe is a much better way to time FDR increases and pick the right FDR tranche for the most interest savings. Speak to our consultants before you decide on refinancing your home loan.
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.