From time to time for the benefit of those new to FHR18 (DBS home loans) or 36FDMR (OCBC home loans), we need to give a quick lowdown on the different types of mortgage packages, or mortgage pegs to be precise, in the market.
A mortgage peg as the name suggests, is the index that the home loan is pegged to. As the index fluctuates in value over time so does one’s interest rate which is often contracted with the mortgagee, or the bank, by adding a certain “spread”, or gross profit margin on the chosen peg. There are generally 3 types of mortgage pegs in the market – SIBOR-based, Board-based or Deposit-based with the last being the newest and most popular in last one year or so.
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SIBOR (or Singapore Interbank Offer Rate) has been used to peg home loans for a long time in Singapore as it is most transparent. This index is administered and owned by ABS (Assoication of Banks in Singapore) and represents the rate in which banks in Singapore offer to borrow or lend to one another in unsecured terms over various maturity periods from 1-month to 12-month. The 3-month SIBOR gained popularity as a peg for pricing home loans due to its transparent nature in which demand and supply forces in the money market takes over control in the setting of interest rates, not individual banks. When there is ample liquidity in the system which has been the case in Singapore since 2004, no banks will want to pay a high rate to borrow in Sing dollar and hence SIBOR has languished below 1% p.a. for long periods until 2014. 3-month SIBOR will be set every 3-months for borrowers hence the monthly mortgage repayment is re-calculated every 3 months.
There is another commonly-used peg for pricing home loans known as Board rate which is an internally-determined rate set by the individual banks. It takes on different names in different banks from simply Home Rate to bombastic-sounding ones like Singapore Residential Financing Rate. It refers to the same concept of a Board rate less off a certain “discount rate” to arrive at the final interest rate payable by the borrower. Strictly speaking this discount rate is not the interest margin or the spread on top of cost of funds unlike in the case of SIBOR. However to keep things simple and consistent in lingo we call it spread nonetheless in our Rates chart. As Board is determined solely by the bank it is not transparent in nature and in fact borrowers could have different board rates in the same bank depending on the time where the contracts are entered into. This is especially common in local banks.
The last and latest addition to the family of mortgage pegs in Singapore is what we call Deposit Mortgage Rate and over at MortgageWise we will refer to it conveniently as DMR. Some of our competitors refer to it as fixed deposit mortgage rate, FD-linked home loan rate etc. This is because DBS was the first to launch this back in Jun 2014 when it pegged its new home loans to what they call FHR (Fixed Deposit Home Rate) at that time or the average of its 12-month and 24-month fixed deposit rate for deposits in the $1000-9999 range. Subsequently the bank tweaked it to base on 18-month fixed deposit instead in Oct 2015 and change the name to FHR18. We prefer to leave out the word “fixed” and just call it Deposit Mortgage Rate (DMR) as some people we speak to confuse it with “fixed rate” mortgage. It is not fixed in nature, just that the peg is based on “fixed deposit” rate of the bank. Neither does it mean that one will need to park money in fixed deposit account before he could take out a such a loan with the bank. DMR literally means a peg for home loans that is based on a bank’s deposit rate. Period.
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OCBC is the 2nd bank to launch their own DMR in Oct 2015 by pegging their new OCBC home loans to the 36-month fixed deposit rate for deposits in the $5000-$20000 range. Hence they decided to name theirs as 36FDMR. We think UOB home loans will see its own DMR in 2016 and we are not dismissing possibility that some foreign banks may come out with DMR based on savings account interest rate.
Some argue that DMRs are essentially like the old Board rate as they are set unilaterally by the banks and homeowners will once again yield control of rate-setting mechanisms to mortgagees instead of free market forces in interbank. Even though that is true, we think there is a notable difference between the two. Board rates are opaque and hard to track. When banks raise the board it may affect different groups of borrowers in their books but no one really know for sure how much is the increase and whether is it the same increase across the board. When it comes to deposit rates which is published by the banks on their individual websites and “on the board” when one walks in to place a fixed deposit, it is a lot more transparent and hence under the close scrutiny of the media. The bank normally has only one singular rate for each deposit type, tenure or amount. The bank will be more “on their toes” should they decide to increase DMR in a bid to raise interest margin or income. Not to mention, depending on how banks define their respective DMRs, they will end up paying higher cost of funds to their depositors in the same stroke.
At MortgageWise.sg, 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.