With SIBOR rising again in recent weeks (currently 3M SIBOR at 0.922 as at 24 Nov 2016), it is a good time to revisit DMR home loans in the market currently only offered by four lenders: DBS, OCBC, UOB, SCB (StanChart):
DMRs (or deposit mortgage rate) is the generic term we coined for the category of home loan pegs based on bank deposit rates, as opposed to the more traditional SIBOR/SOR or lenders’ own internal BOARD rates. The four banks that have introduced DMR mortgages in the past two years have chosen to peg DMR to pre-defined fixed deposit rates at the moment, ranging from 18-month to 48-month (and for specific deposit bands), but we are not dismissing the possibility of some banks offering DMRs peg to a special savings account rate in the future, which is what we hope for.
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The appeal of DMR lies in linking lending rate to a deposit rate so technically the lender would have increased its own cost of funds should it decide to hike lending or mortgage rates for borrowers. Homeowners take comfort that this would in effect be some kind of self-checking mechanism on future rate increases. However the reality is not so simple. Since the inception (2014) of DMR as a new category of home loan pegs in Singapore, we have repeatedly cautioned that when banks adjust their DMR goes up, the hit on their cost of funds is miniscule compared to the revenue surge in banks’ NIM (net interest margin). And we have also proven that using publicly-available data from DBS, the only lender to reveal its S$ CASA (current account & savings account) vs Fixed deposits composite, to demonstrate that the hit in raising FHR18 is likely only on 2% of its S$ cost base in the case of DBS. On the other hand we speculate by now possibly more than half of its mortgage loan books are pegged to DMR. The other 3 lenders probably will have a lesser skewed deposits structure compared to the “nation’s bank” with its huge POSB’s CASA base. And perhaps SCB would be more dependent on fixed deposits than local banks. Having said that, no one in the right frame of mind would walk into SCB to place a 48-month fixed deposit at today’s meagre rates. Hence once again the cost impact will be minimal.
Our point is this – whether or not DMR proves to be just another BOARD rate in disguise, or it is truly a laggard to and hence less volatile mortgage peg than SIBOR, will depend on how the four lenders manage DMR movements going forward. If the lenders mismanage this it will just become another BOARD rate which has irked many experienced homeowners in earlier decades (before the Great Recession) as being “first to rise but last to come off”. To this end we will be monitoring very closely, and keeping all our clients informed should there be any unexpected surprises. If you like to work with a trusted mortgage planning partner over duration of your mortgage, then speak to our consultants today.
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As we mentioned earlier, there is at least one big differentiating factor between DMR and BOARD rate. While lenders have no qualms to up its internal BOARD lending rate at any time or by any frequency or amount, they will be more restraint in doing the same for DMR. This is because DMR, unlike BOARD which can vary for different group of homeowners even within the same bank, is a singular rate for the bank that is published on its website. Therefore it is a “high-visible” loan peg where any slight movements get picked up not only by established mortgage consultants like ourselves, but the press as well. And when it comes to negative news, no one will want to take the lead and it is precisely for this reason that we speculate the big boys in the industry, ie. the 3 local banks that command easily 80% of the mortgage market, would have to go first. And that is exactly what happened last December (23 Dec 2015) when DBS raised its FHR18 for the first time within a week of US Fed’s historic rate hike in a decade. Banks need to justify making any such increases by allowing SIBOR to first rise substantially as DBS has demonstrated with a lag time of almost a year when SIBOR went from 0.60 at start of 2015 to 1.08 at the end of the year, though we do not think the lag will be this long going forward. See historical SIBOR charts on our Resource page to get a better idea.
As all DMR mortgages come with a minimum of 2 years lock-in right now, homeowners need to think very carefully before signing on the dotted line. Generally we do not advise lockins in an environment where rates are expected to trend up, except for fixed rate home loans where there is no risk of an escalating interest during the lock-in period. However it may still work for some people who does not like the idea of refinancing every few years whenever the fixed rate ends. It is also a case of choosing between the devil and deep blue sea when it comes to SIBOR or DMR home loans. When federal funds rate moves up in US, SIBOR is certain to trend up almost immediately, whereas you take a chance that the lenders here will respond with subsequent increases in DMR or deposit rates in a responsible and justifiable manner.
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For those who do not like all the guessing work of how fast interest will go up from here, stick with fixed rate mortgages. Speak to our consultants quickly as there may still be few packages left with attractive fixed rates below 1.60%. We are expecting banks to raise fixed rates soon especially if SIBOR continues to go north bit by bit as we go nearer Dec’s FOMC where it is almost certain US Fed will hike rates again. So you better move fast.
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.