The answer is not yet. But the bad news is that with 3-month Sibor itching up past 1% p.a. this week, the bank has chosen to increase its spread for new loans with immediate effect.
For those who are not familiar, FHR or Fixed Deposit Home Rate is a peg for unique to DBS home loans and it has proven to be the most popular choice for both new loans and home loan refinancing for first half of 2015 thus far. As fixed rates start to hover close the 2% p.a. mark after March, our team here at MortgageWise has also been recommending the FHR floating rate loan (at 1.50% before this increase) for some time now.
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FHR is defined as the average between the 12-month and 24-month fixed deposit rates for amounts between $1000 to $9999 published on DBS’s board (usually for renewals of fixed deposits). These rates are now 0.25% and 0.55% respectively and have not moved since FHR was launched back in Jun 2014. This gives rise to a value of 0.40% for FHR which is what most DBS home loans are based upon now.
Before the increase this week, the bank adds a spread of just 1.10 above FHR (final rate 1.50% p.a.) in the first three years of the loan for its floating rate packages with no lock-in period. Thereafter from year 4 onwards the spread goes up to 1.60. At 1.50% p.a. it is even lower than prevailing fixed rates in last few months in the 1.88-2.00% range.
After the increase, the spread now goes up to 1.30 above FHR (final rate 1.70% p.a.) in the first three years and 1.80 from year 4 onwards. Furthermore it now comes with a 2-year lock-in period and one has to take a mortgage insurance with the bank to qualify for this 1.30 spread in the first three years otherwise the bank adds another 10 basis points to the spread to 1.40 (final rate 1.80% p.a.). The bank also offers a higher spread of 1.50 for those who prefer not to have any lock-in period.
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At MortgageWise, we have correctly predicted that DBS, being hungry for more market sharein mortgage market in Singapore, will want to hold its FHR unchanged at 0.40 for as long as it can, choosing instead to increase its spreads for new sign-ups. By doing so, it also cleverly sends a message to the market – if you like the stability of the FHR home loans, it pays to switch over earlier than later as the spreads just keep going up for those who sign up later.
To put it in perspective, when Sibor rises, all banks in Singapore will need to adjust their board rates up and this adjustment by DBS is a fair one considering Sibor has also increased by about the same 20 basis points from 0.82 to 1.00% p.a. So the new revised FHR rates are still competitive by all standards. We are expecting all the other banks to start adjusting up their board rates soon if Sibor continues to trend up.
We are glad to have asked our clients to switch over to DBS earlier as those who have done so would now still be paying 1.50% p.a. on their new loans. Still, we want to be very objective here, FHR is a floating peg and at some point the bank will have no choice but to move it up slowly for example from 0.40 to 0.60 to 0.80 and so on.
When will that happen? No one knows for sure how DBS Treasury will manage its cost of funds. At the moment what we hear is that as far as Sing dollar deposits are concerned, they are still running a surplus – they have room to lend out more in Sing dollar; which is why they are going for market share in home loans market in the first place. I do like to venture a guess as to the timing of the first increase in FHR, by looking at the psychological angle when the spreads for new sign-ups to FHR loans keep going up. It cannot keep rising without hitting a level when huge resistance starts to set in, for example if this spread in the first three years goes up from the current 1.30 to say 2.00 level and that for year 4 onwards going from current 1.80 to 2.50. Psychologically it is just very hard for people to accept a “spread” of such a large number like +2% when the market is used to sibor loans being priced at +0.80% to +1.25% even though the two are not exactly an apple-to-apple comparison. DBS along with its national bank POSB’s deposits just have this unfair advantage of a much lower costs of funds compared to other banks.
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Homeowners will start to resist paying so much profit or “spread” on FHR to the bank. In fact I think the sensitive region will be somewhere in the 1.50 to 2.00 for spreads in first three years. In other words, I am predicting that DBS might start to move its FHR when 3-month Sibor starts to hit anywhere in the range 1.20 to 1.70, possibly 1.50. This will be a necessary step for the bank as resistance sets in for new sign-ups and loan growth slows, and when the bank can no longer grow its interest income through volume then it has to up its interest margin via a higher FHR. This point might be reached sometime in 2nd half of 2016.
One caveat here is that this may be an overly simplistic view of things as the whole business of managing bank spreads requires an entire Treasury operations. It is just an opinion. For all you know, DBS could hold FHR at 0.40 for a long time and keeps increasing the spread for new sign-ups beyond 2 to 3% in the next few years as sibor rises. After all as we have already covered this repeatedly in this blog, they can afford a drain on their 12-month and 24-month fixed deposits which only forms 2% of their entire deposits base.
However we do not think so. One sign that supports our view could be this – the bank now introduces a 2-year lockin for lower spreads on FHR loans for fear of outflow when they eventually hike FHR. Are they getting ready for it?
And if we were right in our predictions, there should be just 2 more rounds of increases to spreads after this, before FHR moves. Hence those who like to enjoy lower FHR spreads will have at least one last chance to come in before that happens.
At MortgageWise.sg, we seek to be your home loan Singapore solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner when you buy Singapore condo. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.