What if I told you DBS is offering a zero spread on Fixed Deposit Home Rate (FHR) 18 loans? That’s right, you say “what?” because none of this stuff is in English. In order to clear up the confusion, we’re here to explain to home buyers how this latest kind of loan works, and how it makes your property cheaper.
What is a Fixed Deposit Home Rate (FHR) loan?
A Fixed Deposit Home Rate (FHR) means the interest rate of the property loan is pegged to the bank’s fixed deposit rate. For example, if the fixed deposit rate is 0.8 percent, and the bank’s spread (explained below) is one percent, then your home loan interest rate is 1.8 percent per annum.
The Fixed Deposit Home Rate (FHR) is accompanied by a number, such as FHR 18. This number is just a gauge of the average fixed deposit rate over a given period. So FHR 18 is pegged to the bank’s 18-month, average fixed deposit rate (which would differ from a six-month rate, and so forth).
Why is the Fixed Deposit Home Rate hot right now?
Banks like DBS, and previously UOB, offered an FHR loan with zero spread. Home loan rates in Singapore are always pegged to some kind of index. That index could be SIBOR, SOR, FHR, and so forth. The spread is added onto the index to determine your total interest rate.
For example, if the index being used is 0.9 percent (whatever that index may be, SIBOR, SOR, FHR, and so on), and the spread is 0.7 percent, your interest rate is 1.6 percent.
FHR took off in a big way recently, because the spread being charged was zero. As DBS and UOB both had fixed deposit rates of around 0.6 percent, this meant the interest rates on their home loans were a shockingly low 0.6 percent per annum.
Perhaps it’s easier to see in dollars:
Say you have a loan of $800,000, on a 25 year loan tenure, at a typical interest rate of 1.8 per cent per annum. You would pay around $3,313 per month.
But if you took the DBS or UOB zero spread package, your interest rate is 0.6 percent. This would mean repayments of around $2,872 per month – that’s a savings of about $441 per month.
However, there is a restriction: the deal is only available to properties that are under development. And once your property is completed (receives the Temporary Occupancy Permit), the spread goes up to one per cent. That means after three years (the time it takes most properties to TOP), your monthly repayments would be $3,237 per month. (You still save about $76 a month, compared to more typical packages).
But I’ve heard that Fixed Deposit Home Rate has a hidden risk, because it’s a board rate
A “board rate” means that the bank has full control over the interest rate, and can raise it at any time. Therefore, many people prefer packages that are pegged to SIBOR or SOR (these indexes are regulated by the Monetary Authority of Singapore, and no single bank can cause them to go up or down).
There’s no denying the fact that FHR is a board rate. The bank does have full control over it, as it can raise or lower its own fixed deposit rates at any time. However, there is an inherent control measure.
If the bank were to raise its fixed deposit rates, it would also have to pay out more to everyone who deposits money with them. This would raise their own liabilities. Also, the bank cannot hide any intent to jack up interest rates (whereas other kinds of board rates do allow for this kind of secrecy). The bank has to advertise its fixed deposit rates, so you can always see it coming and refinance.
Critics are not wrong in saying there is an inherent risk, in that banks can exercise unilateral control over the interest rates. But the banks can only raise costs to the borrowers by also raising costs to themselves, so there is less inclination for them to do so.
Who should get an Fixed Deposit Home Rate loan?
For starters, people who trust the ties to fixed deposits are sufficient disincentive for banks to raise rates. If you don’t trust the bank, and you dread the thought of them suddenly doubling the interest rates or whatever, then this kind of loan will just make your nervous. Forget about it, and get a SIBOR loan. For regular home owners who want an under-development property however, this is a good way to save money in the first few years (likely when you most need it, if you are just now settling down).
This loan is also going to be of interest to property investors. One of the main drawbacks of under-development property is that you cannot rent it out; while there is often an early bird discount for buying early, this seldom makes up for losing out on three years of rental income.
In order to minimise the impact of this, a landlord could take an FHR loan and pay less interest during the construction period. By the time the property TOPs, they can rent it out and compensate for the added one percent spread.
This will also be of interest to short term investors, who plan to sell the property after the three-year Seller Stamp Duty (SSD) period. They can pay a lower interest rate for the three years when the property is being completed, and then sell on the fourth. Less interest means better gains upon resale.