Ravi Chandran
DBS, a leading mortgage loan lender, on July 18 launched a National Day home loan promotion which offers a fixed rate home loan package with an introductory rate of 1.89% in the first year.
1+1+1 Fixed Rate Package
The DBS fixed rate home loan package offers free conversion to any prevailing loan packages during Year 2 or 3 of their loan.
| Year 1: | Year 2: | Year 3: |
|---|---|---|
| 1.89% p.a. | 2.18% p.a. or any prevailing loan package | 2.18% p.a. or any prevailing loan package |
| Thereafter |
|---|
| FHR8 + 1.23% p.a. |
Floating Rate Package With 1-Year Lock-in
| Year 1: | Year 2: | Year 3: |
|---|---|---|
| FHR8 + 1.13% p.a. | FHR8 + 1.13% p.a. | FHR8 + 1.13% p.a. |
| Thereafter: |
|---|
| FHR8 + 1.13% p.a. |
FHR8 refers to DBS Bank’s prevailing 8 months Singapore Dollar fixed deposit rate for amounts between S$1,000 and S$9,999 or such other sum as they may specify. It is currently 0.950% p.a.
The Chinese Daily Zaobao reported that besides DBS, two other banks have introduced a fixed rate home loan package which is lower than the floating rate mortgage loan package.
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Chief Mortgage Officer at iCompareLoan, Mr Paul Ho, speaking on the fixed rate home loan package offered by the various banks said, “I am not surprised by the rates falling to the >2% level. The US Fed is expected to cut their rates this month and these banks are just positioning for first mover advantage when the cut happens.”
He added, “But when clients come direct to us to find the best home loan for them, very often we will be able to find them an even better rate than what they will find on the internet.”
Home owners tend to baulk at fixed rate home loan package because it is more expensive. They want to take a floating rate package that is cheaper than a fixed rate package and then hope that floating rate will not rise.
Generally, when the mortgage interest rate upward trend has been established, the fixed rates would have moved even higher. Home owners on floating rate packages then start to receive letters from banks informing them of the new increased rates. Many will be shocked and upset.
Fixed rate home loan package are almost always more expensive than floating rate packages.
https://www.icompareloan.com/resources/mortgage-broker-singapore-best-rate/
As banks are unsure of the future interest rate environment, they will need to enter into hedging contracts, which incur a fee, to guarantee you the future rates. It’s like buying an insurance policy against interest rates going crazy.
For example, if the current borrowing cost of the bank is 1.5%. The bank may then decide to create a fixed rate package that is 2% fixed for 3 years.
However, the bank does not know what will happen in year 2 and year 3. What if the cost of borrowing for the bank rises to 3% for year 2 and 3?
This would mean that the bank’s profit would be: –
- Year 1 = 2% – 1.5% (cost of funds) = 0.5%
- Year 2 = 2% – 3% (cost of funds) = -1%
- Year 3 = 2% – 3% (cost of funds) = -1%
- Total over 3 years = -1.5%
A bank is unlikely to create a product that has a risk of losing money. So banks typically pay a fee to go into a hedging contract.
https://www.icompareloan.com/resources/mortgage-type/
The bank will buy a hedging product that would guarantee them 2% for year 2 and year 3 and maybe pay a fee of maybe 0.3% to do so. It is similar to insurance.
Hence the bank’s profit would be: –
- Year 1 = 2% – 1.5% (cost of funds) = 0.5%
- Year 2 = 2% – 1.5% Cost of funds + 0.3% Hedging cost = 0.2%
- Year 3 = 2% – 1.5% Cost of funds + 0.3% Hedging cost = 0.2%
- Total (over 3 years) = 0.9%
A guaranteed profit for each mortgage loan product is probably more important for the bank than the potential to make more money, but also open to the possibility to lose money.
Mr Ho said, “sometimes we have customers who come to iCompareLoan and say, ‘Find me a home loan that is fixed. I want a fixed rate for the entire tenure of my loan’, but currently there are no banks that offer a perpetual fixed rate for the entire loan tenure.”
He added, “a fixed rate home loan package is typically fixed for between 1 to 5 years of the loan tenure. After the fixed rate period ends, the subsequent years revert back to floating rates.”
“Many people are confused. They tell us they got a 36 months fixed rate mortgage very cheaply. Upon closer investigation and to their horror, it was not a Fixed Rate for 36 months, it’s a Floating Rate package pegged to the 36 months fixed deposit rate.”
Mr Ho said, “customers should go directly for a fixed rate home loan package if the difference with the floating rate is not very much more expensive.”
How to Secure a Home Loan Quickly
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