shock that banks can raise spreads on home loans

They Say SIBOR Is Volatile

Bankers often like to say that when marketing mortgages pegged to BOARD rate or FDR (fixed deposit rate), but without regard for which part of the interest rate cycle we are in.

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This reminds me of the same situation about five years ago when interest rate began its slow accent in Singapore following oil price crash towards end of 2014 – bankers then touted BOARD rates as the most stable mortgage peg as it had not moved in the last 5 years.  Of course!  Because there was no reason for rates to move back then with US Fed pump priming an economy into life via three rounds of QE (quantitiative easing) if you recall.

My point is simply this – the context is important.  Just like how property investors who bought during the market peak in 1996 barely broke even when they sold off 10 years down the road; or how those who bought in the property market doldrums of early 2009 enjoyed spectacular profit margins. The same goes for interest rate cycles – those who had locked down fixed rates when rates were on its way up during 2016-2017 had made some wise moves; doing the same when we are near an inflection point now or near the peak of the cycle runs the risk of being stuck with a high rate should interest rate tumbles down.

Incidentally we forecast this back in March 2016 that interest rate should take 5-6 years to peak in this current cycle which means we are somewhere near the end by 2020/2021.  In recent weeks, more dovish statements by US Fed chair (who started dropping the phrase “Fed will be patient”) has got financial markets now pricing in at least one rate cut by US Fed before the year is over, maybe two.  So the cycle could even turn much earlier.  All eyes will be on the next major Fed FOMC meeting in two weeks’ time which we will be covering, so watch this space.

Back to question on the volatility of SIBOR. That is certainly true as it exhibits a much wider swing from peak to trough (see graph below).  However, that is both a boon and a bane depending on which part of the interest rate cycle one is in. When interest rates are going up, having one’s mortgage tied to SIBOR means interest rate and hence the monthly repayment will be revised upwards every month or every 3-month (for 1-month and 3-month SIBOR respectively) whenever SIBOR increases.  On the other hand, when interest cycle reverses and rates start dropping, the converse is also true – one sees the monthly repayment being adjusted down immediately the next month (for 1-month SIBOR)!

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As SIBOR is determined by money market forces and not dependent on the unilateral decision of any one single bank, we are of the view that should interest rate cycle reverses downwards, SIBOR’s volatility would make it the first amongst all mortgage pegs to fall.  We cannot say the same for BOARD or even FDR (which really has become a lending rate) where it may take up to 6 months or even a year for banks to adjust down as doing that too soon would mean a cut in the banks’ interest margin for the current financial year.

HSBC has just adjusted up their TDMR24 in May last month from 0.65% (unchanged since its launch in Dec 2017) to 1.40%!  It is the latest and last bank to hike FDR rates. Whether lenders will continue to hike on FDR pegs from here depends on the movements of SIBOR.  For the time being with no expectation of further rate hikes from US Fed this year, we are seeing mortgage rates stabilizing more or less at the current levels be it SIBOR or FDR.

So in conclusion, SIBOR is indeed volatile as what bankers claimed, but not necessarily in a negative way.  It can also work for the benefit of homeowners when interest rate cycle reverses. FDR mortgage pegs have worked well over the past few years until banks start to move up aggressively on FDR (as well as BOARD) pegs towards the end of 2018.  The crux is deciding at which part of the interest rate cycle are we at right now, and for that the best way is to take a look at the historical trending chart of US Fed funds rate vs SIBOR which we have shown in our article last month, and ask ourselves which trajectory is the most likely?

us fed funds rate

Refinance with our team of mortgage experts here at MortgageWise and you will receive $150 Refinancing Valuation Fee Offset from us, subject to min loan of $500,000. New purchase home loans will also enjoy a Special Purchase Legal Fee of $1,800 (all-in cost including mortgage stamp duty, gst) from our partner law firms.  Other terms and conditions apply.  So, speak to us today.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
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