DBS pegs mortgages to fixed deposit rates

[SINGAPORE] DBS Bank has introduced a new benchmark for its mortgages - they are pegged to the bank's fixed deposit rates, which it said is easier for customers to understand and is pretty transparent.

It's the first time a bank is basing a mortgage on its fixed deposit rates.

Called the fixed deposit home rate or FHR, it takes the simple average of the bank's 12-month and 24-month fixed deposit (FD) rates. The FHR is currently 0.40 per cent, based on DBS' 12-month FD rate of 0.25 per cent and 24-month FD rate of 0.55 per cent.

DBS continues to sell loans pegged to Sibor (Singapore interbank offered rate), which are also the most popular home-loan product at other banks, but said that customers are receptive to its new FHR package.

"The response has been encouraging," said Lui Su Kian, DBS Bank's managing director and head of deposits and secured lending.

More than half of home buyers who opt for floating rates have taken up the FHR package since it was launched two to three months ago, she said. The others continue to go for Sibor. The rest of the borrowers go for the bank's fixed rate packages, she said.

The FHR is an easy to understand and transparent pricing product, she added. "Most consumers lean towards Sibor rates - they want something simple and easy to understand."

Sibor rates, which are wholesale rates, can be accessed easily. They are administered by the Association of Banks in Singapore.

Ms Lui noted that Sibor formulas are quite technical.

Will the new product improve DBS' margins?

"The outcome we'd like to see is . . . that margins are stable and keep inching up," Ms Lui said.

Some bankers note that Sibor rates being wholesale prices are more volatile.

Over the past 24 months, there has been some volatility in the three-month Sibor which is the most popular tenor for home loans. It's ranged from a low of 0.37083 per cent to a high of 0.40626 per cent; it's presently at 0.40376 per cent.

The last time DBS adjusted its 12-month and 24-month fixed deposit rates was in 2012, said Ms Lui.

"The popularity of interbank rates is a clear indicator that consumers desire transparency especially for large financial commitments such as mortgages," she said.

However, interbank rates such as Sibor have been known to fluctuate while fixed deposit rates are less volatile, she said. "Hence, FHR will appeal to home buyers who wish to take advantage of the low interest environment and yet have some protection from market movement."

Rival banks are sticking to Sibor-pegged home-loan packages, noting its transparency.

Said Dennis Khoo, United Overseas Bank's Singapore head, personal financial services: "Home loans pegged to Sibor allow home buyers to capitalise on the current low interest rate, but the rate will vary along with interest rates movements."

"Likewise, home loans pegged to fixed deposit rates will be impacted by interest rates movements.

"Most customers prefer Sibor-pegged packages due to its open and transparent concept. It is determined by the banks in Singapore and published by the Association of Banks in Singapore," said Phang Lah Hwa, OCBC Bank head of consumer secured lending.

The stability of Sibor in recent years has also contributed to the popularity of these packages, said Ms Phang.

Our experience shows that most of the customers who take up our mortgages prefer an index-linked package as we offer the widest range of Sibor indices, said Peng Chun Hsien, Citibank Singapore head of secured finance and e-business.

We also allow customers to switch Sibor any time during their home-loan tenure with 30 days' notice or on the Sibor expiry date, said Mr Peng.

This flexibility adds to the attractiveness of our offering, he said.

"We believe that being pegged to fixed deposit rates does have some inflexibility for the customers who may have to stay within an agreed rate for a fixed period of time," said Mr Peng.

Though interest rates have been low for several years, they are forecast to start rising next year when US rates do so in response to improving economic conditions.

Borrowers should realise that when interest rates move, the movements can be steep, up or down.

In August 2011, Swap Offer Rates (SORs) briefly turned negative and borrowers thought they would benefit, that is, banks would pay them instead. SOR represents the synthetic cost of borrowing Singapore dollars, by borrowing US dollars for the same maturity and swapping these in return for Sing dollars.

But banks invoked a market disruption clause to reset the rates charged to customers and since then they have withdrawn SOR pegged home loan packages. SOR continues to be used by corporates.