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Should Singaporeans be worried about increased fixed deposit-linked mortgage rates?

By Vinod Nair, MoneySmart.sg

Now that DBS has raised its fixed deposit-linked home loan rate or DBS FHR two weeks ago from 0.5 per cent to 0.6 per cent, should Singaporeans be concerned?

Why has the DBS FHR gone up? And why now?

The Federal Funds Rate has seen near 0 per cent since the last couple of years and only surged past 0.25 per cent just last December 2015. By the end of 2016, the Fed interest rate is predicted to rise to about 1.4 per cent – bringing it close to 2009 levels. This rise in the Fed interest rate has already affected the Singapore Interbank Offered Rate, better known as SIBOR. This is the interest rate used by banks to lend unsecured funds to other banks in Singapore. It has also been one of the more popular methods for banks to determine their home loan interest rates.

The SIBOR is closely connected to the Fed interest rate, and an increase in the Fed interest rate would mean an increase in the SIBOR. In actual fact, the SIBOR started its climb upwards in 2015, long before the official announcement of the Fed interest rate hike. It went from 0.45 per cent at the beginning of 2015 and to it’s current rate of 1.19 per cent.

The DBS FHR is indirectly pegged to the Fed rate rise

The SIBOR is not the only interest rate that is influenced by the Fed interest rate. Fixed deposit rates in Singapore also rise and fall according to the Fed interest rate. To maintain strong deposits in Singapore, banks need to make sure their rates are competitive.

 

The fixed deposit rate data from the chart shows the average rates quoted by 10 leading banks and finance companies, according to MAS. It should be noted that the fixed deposit rate for 3-, 6- and 12-months all follow a similar trend. The Fed interest rate not only influences how fixed deposit rates are adjusted, but is able to predict them.

As the Fed rate increased from 2005 to 2007, fixed deposit interest rates rose sharply in response. Conversely, as the Fed rate plummeted from 2007 onwards, fixed deposit interest rates gradually dropped as well. The DBS FHR is currently pegged to DBS’ 18-month Fixed Deposit rates. While that rate history is technically not on the graph above, it is safe to presume that it follows a similar trend. This means that we can expect DBS’s raising of their 18-month fixed deposit interest rate from 0.5 per cent to 0.6 per cent, and this is just the beginning.

Should homeowners on a fixed deposit-linked home loan package worry?

So with the FD rates and the SIBOR going up concurrently, is it a wise move for homeowners to shift to a fixed rate package?

1. Fixed Deposit rates are generally more predictable than the SIBOR

A fixed deposit rate is always going to be less volatile than the SIBOR. Even before the Fed rate increased last month, the SIBOR was already spiking upwards up since the start of 2015. While fixed deposit rates will increase, they will probably never increase as quickly as the SIBOR. This is because fixed deposit interest rates represent a cost to the bank. When someone puts money into a fixed deposit account, the interest is how much the bank needs to pay their customers. As a result, it is less likely that banks will increase fixed deposit rates sharply. Historically, fixed deposit interest rates have not seen past 2 per cent. Conversely, the SIBOR has exceeded the 2 per cent mark, before 2008.

2. Fixed home loan rates aren’t necessarily the solution either

Fixed rates usually increase when floating rates increase. A fixed rate will cost you a little bit more than a floating rate. After all, you are paying for the security of a good night’s rest knowing that your home loan interest rate will not spike overnight. However, it is important to note that even fixed deposit rates don’t last forever. Fixed deposit rates eventually become floating rates after a certain period of time. This means that although consumers are paying more for security now, it is only a temporary measure.

3. Home loans pegged to Fixed Deposit interest rates are no longer the monopoly of DBS anymore

When a market becomes competitive, it is always the consumer that benefits. When OCBC introduced their version of the FHR – known as the OCBC 36FDMR this year – it meant competition for the DBS FHR. So far, OCBC has not changed their interest rate yet, and they probably won’t, in an attempt to capture more market share in the coming months. Should UOB or any other bank also follow suit and start fixed deposit-linked home loans, then there may be even more pressure on DBS and OCBC to remain competitive.

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