What Exactly Are Fixed Deposit-Pegged Home Loans and How Do You Choose One? - MONEYSMART

When you think innovators, you think of Apple and the late Steve Jobs and how one iGadget after another quickly became the norm – everything from pocket-sized music players, mobile phones without keypads and computers that are no bigger than an A4 sheet of paper.

When you think innovators, you don’t think of banks. But now that products like fixed deposit-pegged home loans are becoming the new normal in Singapore, maybe local banks are the new innovators. I’m just glad they didn’t call it the iLoan.

What are Fixed Deposit-Pegged Home Loans?

The short answer is: home loan packages where the interest rate is linked to a bank’s fixed deposit savings account interest rates. If those interest rates go up, so do the home loan interest rates.

DBS pioneered this product back in 2014 with the Fixed Deposit Home Rate, better known as the FHR. Since then, the FHR has helped DBS dominate the home loans market in the years since. Not surprisingly, several other local and foreign banks have followed suit, hoping to grab a piece of that pie with their offerings.

What should you look out for in a Fixed Deposit-Linked Home Loan?

While fixed deposit-linked home loans are becoming more popular in the market, they’re not very different from the home loan packages you’ve been used to in the past several years. So regardless of what kind of home loan package you’re getting, you should always look out for these factors:

1. The lock-in period

It’s one thing to enjoy a low interest rate, it’s another thing to be unable to refinance without penalty once the interest rate goes up (and it will go up). Look out for packages that have lock you in for a short period of time. Some packages in the market today don’t even lock you in at all!

2. The spread

We’ll get into the specifics later in this article, but for now, we have to point out that referring to the fixed deposit interest rate is only half the story. The other half is known as the spread. So if you see a home loan package that looks like this:

1st Year: DBS FHR9 + 1.13%

The 1.13% figure is known as the spread.

Basically, it means that in the first year, you will be paying whatever DBS’ 9-month fixed deposit interest rate is (currently, it’s 0.25%), plus a fixed spread of 1.13%. In your first year, even though the FHR9 may change, the spread of 1.13% will not.

This is especially important when it comes to comparing – you need to compare home loan interest rates in total, and not just focus on the fixed deposit interest rate that the package is pegged to.

Okay, so which Fixed Deposit-Linked Rate should I choose?

There are currently 5 fixed deposit-linked rates available in Singapore. The three local banks are represented, but there are also two foreign banks – Standard Chartered and Maybank. Here’s what the packages currently look like:

What does this table tell us?

There are two main observations one can make from this:

It looks like iLoan was a better name – FHR, FDMR, FDPR all sound like remnants of the former Soviet Union. And FDR were the initials of the US president during World War II. Banks be taking this price war way too literally.

I’m joking.

1. Fixed deposit interest rates are controlled by the bank

Seriously, DBS has consistently changed the fixed deposit interest rate that it’s pegged to. The current rate, the 9 month fixed deposit interest rate, is the third rate in as many years that the DBS home loan package has been pegged to. This drives home the fact that no matter how transparent the rates are, they’re still under the sole control of the bank.

The good news is that fixed deposit interest rates represent a cost to a bank. So presumably local banks, which have larger deposit volumes compared to foreign banks, will be less willing to adjust their rates in either direction.

That said, you have to wonder why DBS is the only bank that chooses a shorter fixed deposit tenor – is it to make their package look more appealing because the interest rate is lower? Because it ultimately doesn’t matter once you consider the spread. Which brings me to my second point.

2. Compare rates in its entirety – with the spread included.

You’ll quickly notice that banks are using the spread to stay competitive. Maybank may have the highest fixed deposit interest rate right now, but have adjusted their spread so that they’re not offering the highest overall interest rate for home loans. In fact, they’re tied for lowest interest rate.

On the other hand, despite DBS’s high first year spread, it is also tied for lowest interest rate.

3. Look out for the “thereafter spread” too!

Because of the presence of lock-in periods and the option to refinance and reprice, we didn’t include how the home loan packages’ interest rates change after the first year. But this is definitely something you should keep in mind.

Some banks, like OCBC, offer a throughout rate. This means that the spread will not change. It will remain at 48FDMR + 0.53% regardless of how many years it’s been.

Other banks, like Maybank, have a “thereafter” rate. It looks like this:

Year 1: FDMR36 + 0.18%
Year 2: FDMR36 + 0.28%
Year 3: FDMR36 + 0.38%
Thereafter: FDMR36 + 0.60%

Lock-in period: 3 years

As you can see, you’ll most likely be paying higher interest rates with each new year. Assuming FDMR36 remains at its current rate of 1.20%, you could be paying 1.80% by the fourth year thereafter.

This means there’s a high likelihood you’ll want to refinance after the 3 year lock-in period ends. While our mortgage brokers try to makerefinancing as convenient as possible for you, you may still consider it a hassle, especially if it ends up costing you more to switch banks.

Are Fixed Deposit-Pegged Home Loans here to stay?

It’s fair to say that intense competition between banks will focus on home loan packages that can be easily manipulated. With the SIBOR slowly (but surely) rising, I imagine that fixed deposit pegged home loans will prove to more popular both for home buyers as well as banks hoping to claim a larger share of the market.

But as we said earlier, this innovation is giving much more power to the banks to adjust their interest rates unilaterally. And while raising fixed deposit interest rates currently represent a cost to the bank, the fact remains that they can pull the trigger when it’s convenient for them.

Peter Lin

I am the poster boy for reinventing one's self. I've been a broadcast journalist, technical writer, banking customer service officer and a Catholic friar. My life experiences have made me the most cynical idealist you'll ever meet, which is why I'm also the co-founder of a local pop culture website. I believe ignorance is not bliss, and that money is the root of all evil only if you allow it to be.

Source: MONEYSMART (20 Apr 2017)

A Singaporean’s Guide to Getting a Home Loan in 2017 - MONEYSMART

So we’ve written many articles before on important things to note during your home purchases. But every year, things change and we have different things to note when it comes to something as huge as buying a home. Here’s our 2017 guide on what’s important in your home loan:

The property you’re buying

Are you buying complete or uncompleted properties? You need to take note of specifics of the property you’re buying ‘cause these details do affect the terms of your home loan. An example would be uncompleted private properties, they’re considered a building under construction (BUC). These are usually only eligible for floating interest rate packages and doesn’t come with a lock-in period. The type of property you’re purchasing also affects the points we’re about to mention.

The MSR and TDSR in your Approval In-Principle (AIP)

The Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR): both regulations were introduced so we wouldn’t be borrowing more than we can afford. The TDSR caps all monthly debt obligations such as instalment plans, credit card bills, and bank mortgage repayment to make up 60% of the borrower’s monthly income. The MSR limits monthly repayments to loans granted for the purchase of HDB flats and ECs to a maximum of 30% of the borrower’s income.

A common misconception is that the MSR and TDSR are mutually exclusive things. They’re not. Although bank loans follow the TDSR for private properties and the 30% MSR for HDB resale flats, bank loans for resale HDB flats also have to fulfil the TDSR requirement. And oh, an EC is bought under HDB so it needs to follow the MSR and TDSR too.

Loan-to-Value Ratio (LTV)

“LTV? Wait so does MSR and TDSR and LTV come at the same time? Which one comes first? And so many!! Which one should I follow?” You think of these three terms and you liken them to how you can never find a balance between the women in your life.

There are so many ways the banks follow to determine the amount you can loan till you don’t even know the difference and functions of each one. Well that’s okay. Before you get your panties in a bunch, I’ll simplify things for you: the MSR and TDSR determines the MAXIMUM amount the banks are willing to loan you, the LTV determines how much of that maximum is applicable for the purchase of your house. So say a couple gets back their AIP from the bank at $800,000, at this stage the banks have already taken into account the TDSR and maybe the MSR (if you’re considering a resale HDB or an EC), their credit history, debt liabilities etc. If the couple decides to buy a resale HDB apartment for $600,000 and it’s their first home, their LTV is 80% and their final loan amount is $480,000 (80% of $600,000). $480,000 does not exceed the maximum amount of the $800,000 the bank is comfortable lending them.

The downpayment

Unlike HDB loans, where the minimum 10% downpayment can be paid fully via CPF, taking up bank loans would require a 20% downpayment with at least 5% paid in CASH. Yes, I emphasise the word “cash”. ‘Cause this cash deposit can’t be paid using your CPF. Hence, besides making sure you have enough in your CPF, getting a bank loan does require you to have a substantial amount of savings on hand. If you don’t, just go for HDB and their higher interest rates. Beggars can’t be choosers. In this current situation, you either get a HDB loan with a higher interest rate, or a bank loan where you’ll have nothing to pay the upfront. If you don’t even have enough in your CPF to finance your home buy with HDB’s loan, well no one can help you then. Don’t buy a house in this case.

Floating and fixed interest rates

Fixed interest rates are basically rates that are well, fixed by the bank for a set period of time. No points for guessing that correctly. It makes a good choice for the risk averse, especially in times when interest rates are threatening to rise. But if you need todecide between a floating interest rate and a fixed one, do understand that fixed interest rates are higher than floating rates. In that sense, you’re paying a premium for the stability.

Floating rates such as the SIBOR or SOR on the other hand, are rates which fluctuate daily based on market conditions. That means the rates can go higher or lower than fixed rates, depending on the economy. But since the US federal rates have increased, it’s high chance that SIBOR rates will go higher so it’s probably not a good idea to get SIBOR now. With ANZ’s retail banking being taken over by DBS, banks in Singapore no longer use the SOR system anymore and board rates are just evil waiting to be unleashed. But before you start running off to Timbuktu…Don’t worry, we still have thefixed deposit-linked rates.

With fixed deposit linked rates, you get to pay a generally lower amount than fixed rate packages while enjoying a similar stability of rates. Although fixed deposit-linked rates are not entirely set in stone like that of fixed rates, they’re more predictable than SIBOR rates as the bank is basically giving you the same interest rate they give out for their fixed deposit accounts. So in a way the bank cannot anyhow come la.

What do you know: we really can get the best out of both worlds!

So what kind of home loan package should I get?

But alright, everything has their pros and cons. With all that’s said, the banks ultimately have the right to change the T&Cs. So it’s best you get a home loan package that best suits your CURRENT needs. In the end this article is just meant to guide you, everyone has different needs and preferences, whatever floats your boat you know?

Otherwise, if you have trouble deciding what’s best, let our friendly mortgage specialists give you a call! They’ll be more than happy to help!

Lynnette Goh

Spoilt kid turned free-spirit, I’ve struggled finding and funding myself taking a road less travelled. These days, I enjoy writing lifestyle topics that bring value to life and its future, injecting humour to otherwise boring topics. Who said personal finance can’t be fun? In my free time, you can find me chasing American dramas, and having the occasional glass of wine over conversations with friends.

Source: MONEYSMART (30 Mar 2017)

Bank Loan vs. HDB Loan: Which is Better? - MONEYSMART

Choosing financing for your home is like a game of “Rathers”. You know, where everyone tackles hard questions like “Would you rather be whipped naked down Orchard Road, or rely on the MRT for transport?” But unlike a game of Rathers, home loan discussions are seldom accompanied by laughter and beer (unless you’re awesome). No, picking a home loan is a serious issue. To save you the brain drain, this article contrasts the ole’ HDB loan with a fancy bank loan:

What’s This HDB Loan Thing?

HDB concessionary loans are a provision for Singaporeans. The interest rate for a HDB loan is 0.1% above the current CPF rate. As of now (2016), that’s 2.6%.

While banks just check your credit, HDB loans have certain restrictions:

• It applies to HDB flats (Duh)
• At least one buyer must be a Singapore citizen
• Buyers’ monthly income must not exceed $12,000 (or $18,000 for extended families)
• Buyers must not own any private residence (in Singapore or overseas)
• Buyers must not have taken more than two previous HDB loans
• Buyers have not disposed of private residential property within 30 months before the loan application
• Buyer’s monthly income must not exceed $6,000 for singles buying a 5-room or smaller resale flat, or 2-room new flat in a non-mature estate under the Single Singapore Citizen (SSC) Scheme

These are just the most pertinent restrictions. There are others, for people who own and operate commercial properties.

That’s the intro. The FAQ is taking up the third and fourth floor.

How Does a HDB Loan Compare to a Bank Loan?

Here’s a simple infographic that can help:

Need more information? Read on.

Depending on the current SIBOR / SOR rates, a bank loan can be better or worse than a HDB loan. Likewise, there are security issues that may appeal to some buyers. In general, a HDB loan is:

1. More forgiving than a bank loan
2. Higher on the interest rate
3. Less intrusive to your cash flow
4. More helpful for the down payment
5. No early repayment penalties

Compound interest vs. compound fracture: At least the fracture doesn’t have a 30 year tenure

1. More Forgiving Than a Bank Loan

This is the biggest appeal of a HDB loan. Bankers have as much compassion as your average rock; fail on your loan repayment, and the frequency of your showers will start to depend on the weather. HDB, on the other hand, will do its best to defer your repayments. Of course, this doesn’t mean that you should plan on failing on your payments as this can have other repercussions as well.

Paid late? Took a bank loan? Maybe you should check the train tracks for him.

2. Higher on the interest rate

As mentioned, the HDB loan rate is 2.6%, and seldom changes. Bank rates are more variable; they’re based on current SIBOR and SOR rates, which are usually cheaper. Bank interest rates typically range between 1.6% – 2% (as of March 2016, with the 1-month SIBOR having dropped to 0.79%).

The downside is that the bank’s rates are variable. You’re guaranteed the same interest rate for three to five years at best (fixed loan package). Beyond that, you’re at the mercy of the market. Also, banks have a huge range of different loan packages; If you don’t understand how to pick the best one, a HDB loan is a simpler choice.

Otherwise, visit home loan sites like MoneySmart, which will display the interest rates of all the banks offering home loan packages. From there, you’ll be able to speak to a mortgage specialist who can actually go into the details of different loan packages to help you make a better decision.

We’re providing for your poverty situation. Our loan may also be causing it, but we’re providing for it.

3. Less Intrusive to Your Cash Flow

If you need consistency in repayments, HDB loans win hands down. The HDB loan is based on the CPF rate, which changes as often as Justin Bieber makes the news for good behaviour. The best a bank can do is to give you a fixed rate package, which lasts just 2-3 years now.

So if you have a tight budget, pick the HDB loan. You’ll know exactly how much to set aside each month. As an added plus, HDB loans come with fewer clauses. You don’t need to worry about pre-payment penalties (see point 5), and deferred (late) payments are easier to negotiate. Let’s not forget that currently, your employer is also contributing 17% of your gross pay into your CPF. So what you are actually paying with your CPF is less as well.

“I won’t be joining you. It’s April, I can only afford to eat on alternate months.”

4. More Helpful For the Down Payment

If you get a bank loan, at least 5% of the initial 20% down payment has to be in cash. You’d best prepare for an amount like $15,000, for even a moderately sized property.

Before giving your patronage to the neighbourhood loan shark, consider a HDB loan. You can use your CPF money (if you have enough) to cover the entire down payment. If you’re just cash strapped for that initial 20%, access to your CPF could give you a wider range of property options.

Uh oh. Dear, when you said to go ahead with the down payment, did you mean on our HOUSE?

5. No Early Repayment Penalties

If you attempt to pay off a bank loan early, there’s a hefty penalty if you are still within the lock-in period. The bank was counting on making money off you via the interest rate, and
the minions of Satan the bank never gives up what they’re owed.

HDB is more relaxed. If you get a sudden windfall, you can rush your repayment. Remember, the faster you clear your debt, the less interest you end up paying. You might even plan for this; if you’re expecting a large cash infusion in 10 years, for example, you can get a HDB loan and plan to settle it quick.

With banks, attempting to pay early lands you a 1.5% prepayment penalty.

Here’s your loan money back, with penalty. And here’s the car loan back too, with the car.

Conclusion

A HDB loan is better if you’re risk averse, or if there’s a chance you can pay off the loan early. It’s also useful if your career is just getting started: The down payment on your house is lower, and you have more chances with missed repayments.

But if you understand the housing market well, and you know how to refinance, the bank loan is ultimately cheaper.

Image Credits:
Unhindered by Talent, frankenstoen, stuartpilbrow, Francesco Schwarz, endiaferon

Ryan Ong

I was a freelance writer for over a decade, and covered topics from music to super-contagious foot diseases. I took this job because I believe financial news should be accessible and fun to read. Also, because the assignments don't involve shouting teenagers and debilitating plagues.

Source: MONEYSMART (12 Apr 2016)