When I think “groundbreaking”, I think of Marvel and Guardians of the Galaxy, which starred a talking raccoon and a walking tree and still managed to pocket US$768 million at the worldwide box office to become this year’s #1 movie so far.
When I think groundbreaking, I don’t usually think of DBS home loans.
But DBS has definitely broken some new ground by introducing their Fixed Deposit Home Rate (FHR). This board rate hopes to become a viable alternative to the Singapore Interbank Offered Rate (SIBOR). Based on the take up rate of DBS home loan packages pegged to the FHR since its introduction in June this year, it seems to have worked.
What is FHR based on?
Currently, DBS has simplified the FHR rate to a new FHR18 package, which is essentially the 18-month S$ Fixed Deposit (FD) rate, which currently stands at 0.5%. The previous formula used for calculating the FHR was an average of the bank’s 12-month and 24-month S$ Fixed Deposit (FD) rates. Previously, these rates were at 0.25% and 0.55%, respectively, making the FHR 0.4%.
Customers who had previously signed up for a package on the old rate will still have their interest rate based on the old calculation method.
So why is FHR a board rate?
Unlike the SIBOR, the FHR is still considered a board rate because it is internally determined, but it is a bit of a hybrid in this sense. DBS still reserves the sole right to adjust the rate as and when it pleases, by adjusting their Singapore dollar fixed deposit rates. Unlike other banks’ board rates, which have no transparency when it comes to how it is determined, DBS has pegged the FHR solely to their own internally determined FD interest rates.
However, it’s important to note that ultimately, FD rates are controlled by the Monetary Authority of Singapore (MAS). This is a monetary policy that provides a floor and ceiling to the banks to keep the FD rates in control. So in this regard, the rates are semi-transparent in that the banks still publish their rates, but there is a margin by which they can adjust the rates.
What are the advantages of FHR?
The FHR is relatively easy to calculate. It’s simply the 18 month bank FD rate, and it is openly published on the bank’s website. In contrast, the SIBOR is determined by at least 8 banks and changes on a daily basis.
It is also good business sense that DBS will want to keep its FD interest rates low, since they represent a cost to the bank.
Over the past decade the FD interest rates have been consistently decreasing. Even with the inevitable US economic growth, they are not expected to increase by much. This perceived stability of the FHR will continue to be its advantage over the relatively volatile SIBOR, which is predicted to increase dramatically in the near future.
Are there any disadvantages of FHR?
Think about Section 377A of our Penal Code. Just because it’s not “actively enforced”, doesn’t make sex between consenting male adults any less of a crime in Singapore, in the eyes of the law. Variable rates are the Section 377A of home loans. Just because the bank says that the board rates have not changed in the past 9 years, they continue to have every right to adjust them, anytime they want to.
The FHR is a board rate. It is much more transparent than other banks’ board rates, but it is still a board rate. Even if it means incurring a cost by raising their fixed deposit interest rates, there is nothing to stop DBS from increasing the FHR as and when they need to.
As Warren Buffett famously said, “Risk comes from not knowing what you’re doing”.
DBS is saving you the stress of figuring out the SIBOR (and all its permutations) and how it can affect your DBS home loan. They want you to choose the simpler, more straightforward option they propose, a rate that is easily calculated.
But unless you’re a child playing Monopoly, you shouldn’t be making a decision about your money solely based on how easy the options are to understand.
Is FHR better than other banks’ board rates?
This is something that’s slightly subjective. There is a transparency in how the FHR is calculated, one that is pegged to information about the bank’s FD interest rates that is readily available online. On the other hand, movements of other banks’ Board Rates are not published and can change at any time. Recent comments online have suggested that Board Rates have increased, but this is hard to verify as there is no transparency at all as to these changes.
Is FHR better than SIBOR?
Right now, the 3mth SIBOR (the most popular home loan tenure) is at about 1.07%, which is much higher than the current FHR of 0.5%. It’s always possible for the SIBOR to drop below 0.5%, but it’s less likely.
How long the FHR will remain at 0.5% is impossible to predict. What we can say is that, responding to the US’s economic recovery, it’s almost certain that the SIBOR will start to rise in the near future. The problem is in pinpointing when that would happen. What seems to be certain is that, based on FD interest rate trends, the FHR will not increase as quickly as the SIBOR.
As a historical example, over the past 20 years (historical information on the Bank’s fixed deposit rates is only available from 2008) :
The highest FHR was 1.80% which happened in Jan 2008. At that time, 3mths SIBOR was at 2.375%
The lowest FHR was 0.1% which happened in Oct 2011. At that time, 3mths SIBOR was at 0.37%.
Of course, when choosing between the SIBOR and the FHR, you should also consider the bank’s charges (also known as the “fixed spread”). Right now, the SIBOR and FHR are almost the same, which means the fixed spread is how the banks will compete for your business. The lower the spread the better!
Still can’t decide between FHR and SIBOR? We’ll help you find the best home loan interest rates and take some of the guesswork out of your home loan application.
Choo Yut Shing
The post DBS Home Loans - The Fixed Deposit Home Rate (FHR) and Why It's So Different From Other Home Loans appeared first on the MoneySmart blog.
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