Home loans linked to fixed deposits are a new player on the Singapore property financing field. With SIBOR rates and SOR rates so closely linked to the US dollar (USD), and therefore pretty vulnerable to possible rate hikes by the US Federal Reserve, it makes sense that many home buyers might be on the lookout for more predictable loans.
Fixed Deposit-Linked Mortgages In Singapore
On May 20, 2016, Standard Chartered Bank (SCB) became the first foreign bank to step into the arena of banks here in Singapore offering mortgages linked to fixed deposits (FD).
This playing field was first pioneered in June 2014 by DBS, with its FHR18 fixed deposit home rate based on its prevailing 18-month SGD FD rate for amounts within $1,000 to $9,999.
A year later towards the close of 2015, OCBC strategically adopted its own version called the 36FD- MR FD-linked mortgage rate based on its prevailing 36-month SGD FD rate to capture the growing market segment with this unique pricing structure.
Finally, in April 2016, UOB joined its 2 local rivals by launching its 36-month fixed deposit property rate based on its prevailing 36-month SGD FD rate.
Perhaps, in an attempt to prevent the very real possibility of domination of the new model by local banks, and the gradual or maybe even rapidly increasing dilution of its home loan market share, SCB threw in a rather heavy-looking "counter punch" with its 48 month, fixed deposit board rate offer (48M FDR).
The 48-month FD rate from SCB is, interestingly, 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 this new kid on the block is going all out to capture a significant market share with a "knock-out" package.
If the pricing competition gets any stiffer, either with the evolution of existing packages or with the introduction of new variant packages from "new" competitors, it should generally benefit consumers.
Hence, it might be a good time for us to compare the FD-linked Mortgage packages. Looking back at the origins and justifications for these packages, it might also be worthwhile to measure them categorically against existing mortgage favourites such as the SIBOR, Fixed home loans and other Board rate packages.
Comparing FD-Linked Mortgages
The table above compares the 4 existing FD-linked Mortgage packages based on some of the important features typically found in all loan packages in Singapore (e.g. lock-in periods, legal subsidies for refinancing, etc).
SCB has the lowest all-in rate currently. SCB and DBS packages have no lock-in periods as compared to OCBC and UOB. There is no jump in the spreads charged by SCB and DBS as well after the third year. However, both OCBC and UOB offer pretty decent legal subsidies for refinancing loans that are higher than SCB, while DBS does not offer any legal subsidies.
A Declining SIBOR/SOR
By now, most of us should be aware that the need for and the subsequent rising popularity of FD-linked mortgages was very much attributed to a fear of rising interest rates and consequently a higher SIBOR/SOR.
While it is true that the SIBOR did rise during the better half of 2015, even before the US Fed raised its interest rates for the first time in December 2015, since the 2008 Global Financial Crisis, the SIBOR has since come down from its peak in March 2016.
So why has the SIBOR come down? Is it because the market expectation of the US Fed increasing its interest rates at least 4 times this year has been watered down? Or is it because the USD has weakened against the SGD since its peak in January 2016?
It is important for us to stay updated on the status of the SIBOR and, should the direction (for its trend) and/or expectations for its behaviour change, understand the reasons behind such movements.
Simply put, if the global economy doesn't improve significantly over the foreseeable future and the US Fed decides to halt any future interest rates hikes or even reverts to cutting rates, the low floating rate packages would remove the incentive to switch to a fixed deposit home loan. The same would happen if the USD weakens and the SIBOR/SOR continues its current downtrend.
Moreover, we should note that while the FD-linked Mortgage packages have been touted to use the relatively more "stable" (against SIBOR/SOR) and relatively more "transparent" (against other Board rates) FD rates, these are still a form of board rate package. What this means is that the FD rates are ultimately determined internally by the respective banks and subject to changes as and when deemed by the banks.
Just imagine this: if there are more sign-ups for these FD-linked mortgages due to their more attractive pricing, and these same low rates will most likely not attract more depositors to place more 18, or 36, or 48 months 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 homebuyers indeed.
Different Strokes For Different Folks
If only life was simpler, perhaps this seeming musical chairs 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 ever changing and individual financial preferences differ, there's really no 1-size-fits-all solution when it comes to taking on a home loan.
Fortunately, there are simple and convenient ways for us to find out more about the various home loans available in Singapore, the easiest of which is comparing home loans at GET.com which will save you lots of time and money as you can see in an instant which package is best for you.
We may also be heartened to find that there is seemingly an evolution of new packages with more competitive pricing but fewer "catches".
You can read about how much money you need for your first HDB flat, or for those who are thinking of buying a condo, you can find out more about how much money you need for a $1.5 million condo in Singapore in this guide to buying a property.
To help you make sense of the home loans on offer, do check out the 4 things to consider when comparing home loans. Knowing what to look out for is important whether you are buying a new home purchase or hoping to refinance your home loan.
Alvin Lock is a contributing writer at GET.com, a lifestyle and personal finance website.