Deposit-pegged Mortgage Rates – Comparison and Opinion

On 20th May 2016, Standard Chartered became the first foreign bank to step into the arena of Deposit-pegged Mortgage Rate packages, or DPMR for short. This playing field was first pioneered by DBS with its FHR (Fixed Deposit Home Rate) packages in June 2014. A year later towards the close of 2015, OCBC strategically adopted its own version called the 36FD MR (36 Months Fixed Deposit Mortgage Rate) to capture the new growing market segment under this unique pricing structure. Finally, in April 2016, UOB, the last of our “Big 3”, launched the 36 FDPR (36 months FD Property Rate).

Perhaps, in an attempt to prevent the very real possibility of a local domination, and gradual or maybe even rapidly increasing dilution of home loan market share, SCB throws in a rather heavy-looking “counter punch” with its 48M Fixed Deposit Board Rate (48M FDR for short).

The 48 months FD rate for SCB is interestingly the lowest Reference Rate among all the DMR packages, although it is also the deposit rate with the longest tenor. Coupled with other attractive package benefits including no lock-in period and legal subsidy, it seems like our foreign friends are not only trying to win the round here, but also to capture significant market share with a “knock-out” package and win the match.

If the pricing competition gets any stiffer, either with the evolution of existing packages, or with the introduction of new variant packages from “new” competitors, it should generally benefit us as customers. Hence, it might be a good time for us to compare the existing DPMR packages against one and the other. Looking back on the origins and justifications for these packages, it might also be worthwhile to measure them categorically against past favorites packages such as the SIBOR, and also the evergreen Fixed and Board rate packages.

The table above compares the 4 existing DPMR packages on some of the important features that are typically found in all loan packages in Singapore (e.g. lock-in periods, legal subsidies for refinancing etc). SCB has the lowest all-in rate currently. SCB and DBS packages have no lock-in periods as compared to OCBC and UOB. There is no jump in the spreads charged by SCB and DBS as well after year 3. However, both OCBC and UOB offer pretty decent legal subsidies for refinancing loans that are higher than SCB while DBS does not offer any legal subsidies.

By now, most of us may have come across various articles covering DPMRs and would consequentially have the following common understanding; that the need and subsequent growth of its popularity was birthed in the face and fear of raising interest rates, or rather the rising SIBOR rate.

I am not here to state the obvious justifications for DMRs Vs SIBOR again, but rather offer an alternative opinion. While it is true that SIBOR did rise during the better half of 2015, even before the US Fed raised interest rates for the first time since the 2008 Global Financial Crisis in December 2015, the same SIBOR has come off from its peak as well in March 2016.

So why has the SIBOR come off? Is it because the not too long ago market expectation for the US Feds to raise rates at least 4 times this year has been watered down? Is it because the USD has weakened against the SGD since its peak in Jan 2016?

It may be important for us to be updated on the current status for SIBOR, and should the direction (for its trend) and/or expectations for its behavior changes, understand the reasons behind the movements.

Why? Because if the global economy doesn’t improve significantly over the foreseeable future, if US Fed decides to halt any future interest rates hikes or even go reverse with rate cuts instead, if the USD weakens further, if the SIBOR continues its current downtrend, then the SIBOR packages renders a reconsideration. Since it is also widely perceived that the SIBOR is more volatile than the FD rates, what can rise up fast can, in theory, come down as quickly too.

On the other hand, while the DPMR packages have been touted to use the relatively more “stable” (against SIBOR) and relatively more “transparent” (against other Board rates) FD rates, these are still board rate packages. What it means is that the FD rates are still ultimately determined internally by the respective banks.

Just food for thought; it is common knowledge now that the DPMRs are becoming more and more popular, which is why there are more and more players coming in to compete. Just imagine this: if there are more mortgages being captured under these schemes because of the low FD rates being used in their pricing, and these same low rates will most likely not attract more depositors to place more 18, or 36, or 48 months FDs, the motivation or incentive to increase the FD rates may get higher as the gap between potential revenue from an increase in FD rates and the cost of paying depositors in similar tenures gets bigger. A very interesting balancing act of the future if this argument is relevant.

If only life was simpler, and we do not have more and more 1st World problems, perhaps the musical chairs of SIBOR to DPMRs to Fixed Rates to SIBOR again and so on, could be better played.

But because economic conditions are ever changing, even more so and more frequently year on year. Because we all may have differing views on what lies ahead, I would hate to state the obvious but no one size fits all.

Fortunately, some of us may be able to rely on our trusted advisers to help us structure our loans and select the most suitable packages. We may also be heartened to find that there is seemingly an evolution of new packages with more competitive pricings but fewer “catches”.