Every Singaporean knows that home ownership and debt independence are each other’s conceptual nemesis. Unless you have a multi-million dollar trust fund to bank on, you will be confronted with the justifiably intimidating challenge of buying a home and an unforgiving noose of debt around your neck you must fight out of before the bankers play hangman with you.
Luckily, banks are also committed to financially empowering the financially motivated by giving them a plethora of products and offers to ease their journey. Today, we will give you an overview and in-depth analysis of one such product recently introduced by DBS Bank.
Say Hello to FHR
The freshly launched and heavily hyped fixed deposit home rate package for mortgages is the brainchild of DBS Bank. The fixed deposit home rate (FHR) is influenced directly by DBS bank’s FD rates instead of being determined by the Singapore Interbank Offered Rate (SIBOR).
Although many Singaporeans and financial experts are skeptical on promoting it as a game-changer that will render SIBOR obsolete, DBS has undeniably succeeded in attracting a sizeable customer base and triggered a fresh debate on testing the limits of customized home loan packages.
While SIBOR rates reflect day-to-day market fluctuations, FHR is pegged by calculating the average of DBS bank’s 12-month and 24-month FD interest rates. Currently, the the FHR is set at 0.40 percent, given the 12-month FD rate of 0.25 percent, while its 24-month rate is set at 0.55 percent.
In addition to this, Singaporeans also have to pay a premium charge known as the ‘spread’. The effective FHR for the loan is a sum of the initial FHR and spread. Therefore, if the spread for the first year is 1% and the initial FHR is 0.4%, then the effective interest rate liable will be 1.4%.
It’s Time to Put SIBOR and FHR Under the Scanner
Let us assume Mr. X is planning to take out a mortgage of $500,000 for a 30-year period. Therefore, he will have to cough up $1,690 in month repayments in the first year if he opts for an FHR loan. On the other hand, a similar package from OCBC Bank or United Overseas Bank (UOB)with SIBOR in place, will amount to $1,762 a month.
Unfortunately, $72 is a drop in the ocean for most Singaporeans and doesn’t really do much justice to their savings when they are committing so much of money for this loan package.
The truth is FHR’s comeuppance lies in its liberation from economic volatility. Unlike SIBOR, FHR is not subjected to constant re-pricing based on daily market demand and supply trends. However, this does not mean that FHR is some magically autonomous solution completely independent from fluctuations.
Fixed deposit rate loans are at the mercy of the bank’s policies, which are considered by many to be unreliable and less transparent than SIBOR-linked loans. Also, since both the FHR and SIBOR are essentially interest rates, a strong global economic recovery will boost SIBOR rates and fixed deposit rates will inevitably follow suit. However, it is important to keep in mind that a rise in FHR will surely not be as dramatic as that of SIBOR’s since the former is a savings rate; whereas, the latter is a lending rate.
Despite this policy pessimism associated with FHR and its lack of ability to impress competitors, some analysts believe that DBS can still take strong measures to keep the FHR low. This is because FD rates are less likely to undergo an unpredictable rise since DBS already owns an overwhelming share of Singdollar deposits (26% to be precise).
However, the odds in the FD vs SIBOR battle still seem to be evenly stacked against each other when borrowers factor in all the premiums. Even though the premium rates for FHR loans are higher than those of SIBOR-linked loans, they can easily be negotiated over and reduced to cater to your budget.
The ultimate factor for determining the superiority or inferiority of FHR loans is its perceived stability in one’s mind. A stable track record of low fixed deposit rates and solid base of deposits is what one should look out for when buying into an FHR loan. Fortunately, DBS has both these things going in its favor.
So far, DBS has received an encouraging response for its FHR package launched earlier this year. Almost half of the home buyers dealing with them who opted for floating rates chose to lock in the FHR package instead of the SIBOR-linked loan packages.
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