Fixed deposit-linked home loans getting more popular

Home loans linked to fixed deposits are the new big thing in the Singapore property financing scene. With the benchmark Singapore Interbank Offered Rate (Sibor) and Swap Offer Rate (SOR) so closely linked to the United States dollar and therefore vulnerable to possible rate hikes by the US Federal Reserve, many home buyers are seeking more predictable loan rates.

FIXED DEPOSIT-LINKED MORTGAGES IN SINGAPORE

In May, Standard Chartered Bank (SCB) became the first foreign bank in Singapore offering mortgages linked to fixed deposits (FD). This product was pioneered in June 2014 by DBS, with its FHR18 fixed deposit home rate based on its prevailing 18-month Singapore dollar fixed deposit (SGD FD) rate for amounts from S$1,000 to S$9,999.

Towards the end of last year, OCBC pushed out its version called the 36FDMR FD-linked mortgage rate based on its prevailing 36-month SGD FD rate to capture the growing market segment with this unique pricing structure. In April, UOB launched its 36-month fixed deposit property rate based on its prevailing 36-month SGD FD rate.

Perhaps, in an attempt to prevent the domination of the new model by the local banks and the dilution of its home loan market share, SCB threw in a heavy counterpunch with its 48-month, fixed deposit board rate offer (48M FDR). This 48-month FD rate is the lowest reference rate among all the FD-linked mortgage packages, although it is also the deposit rate with the longest tenure.

Coupled with other attractive benefits, including no lock-in period and allowance for legal subsidies, it seems like the new kid on the block is going all out to capture a significant market share. If the pricing competition gets stiffer — either with the evolution of existing packages or the introduction of new offerings from new entrants — consumers should benefit.

Let us compare the FD-linked mortgage packages, and measure them against existing mortgage favourites such as the Sibor, fixed home loans and other board rate packages.

The table above compares the four existing FD-linked mortgage packages based on some of the important features found in all loan packages in Singapore (for example, lock-in periods).

SCB has the lowest all-in rate currently. All packages except OCBC’s have no lock-in periods. There is no jump in the spreads charged by SCB and DBS throughout the loan tenor. OCBC and UOB offer pretty decent legal subsidies for refinancing loans that are higher than SCB and DBS.

A DECLINING SIBOR/SOR

The rising popularity of FD-linked mortgages is largely due to the fear of rising interest rates and consequently a higher Sibor and SOR. While Sibor did rise during most of last year, even before the US Fed raised its interest rates in December last year for the first time since the 2008 global financial crisis, the Sibor has since come down from its peak in March this year.

Why has the Sibor come down? Is it because the market expectation of the US Fed increasing its interest rates at least four times this year has been watered down? Or is it because the US dollar has weakened against the Singapore dollar since its peak this January? It is important for us to stay updated on the status of the Sibor. Should the direction of its trend and/or expectations for its behaviour change, understand the reasons behind such movements.

Simply put, if the global economy does not improve significantly over the foreseeable future and the US Fed decides to halt any future interest rate hikes or even reverts to cutting rates, the low floating rate packages would remove the incentive to switch to a fixed deposit-linked home loan. The same would happen if the US dollar weakens and the Sibor/SOR continues its current downtrend.

We should also note that while the FD-linked mortgage packages have been touted to use the relatively more “stable” (against Sibor/SOR) and more “transparent” (against other board rates) FD rates, these are still a form of board rate package. This means that the FD rates are ultimately determined internally by the respective banks.

Imagine this: If there are more sign-ups for these FD-linked mortgages due to more attractive pricing, and these same low rates do not attract more depositors to place more 18-, or 36-, or 48-month FDs, the motivation for banks to increase their FD rates would be greater as the gap between potential revenue from an increase in FD rates and the cost of paying depositors in similar tenures gets bigger. This scenario would not resonate very well with home buyers.

DIFFERENT STROKES FOR DIFFERENT FOLKS

If only life were simpler, perhaps this game of hopping from Sibor to FD-linked mortgages to fixed rates and back to Sibor again and so on, depending on the macroeconomic situation, could be better played. But because economic conditions are always changing and individual financial preferences differ, there is no one-size-fits-all solution when it comes to taking a home loan.

There are simple, convenient ways to find out more about the home loans available in Singapore, the easiest of which is comparing home loans at personal finance portals.

You may also be heartened to learn there is an evolution of new packages with more competitive pricing but with fewer “catches”.

Ultimately, understanding what the home loan package entails is crucial, whether you are making a new home purchase or hoping to refinance your home loan.

ABOUT THE AUTHOR: Alvin Lock is a contributing writer at lifestyle and personal finance website GET.com. You can find the latest and most attractive fixed and floating home loan interest rates using GET.com’s proprietary “Home Loan Genius” comparison tool.