Rates, not benchmarks, need a fix

THE latest home loan innovation to hit Singapore is a benchmark based on fixed deposit rates plus a premium. All the better to vary your mortgage interest with, the salespeople say. But what consumers really need is not another twist to the floating-rate mortgage, but rather better fixed-coupon loans that are easy to account for in budgets and that protect against rising interest rates.

DBS Bank has been making the headlines with its introduction of the "fixed-deposit home rate". The new benchmark is being marketed as an easy-to-understand alternative to the Singapore Interbank Offer Rates (Sibor). Whether that is actually the case is debatable.

The Sibor-setting process admittedly has serious flaws - banks around the world have been found to try to manipulate interbank rates, for example - but most of the time it serves its purpose adequately. Because the benchmark is so widely used, there is usually an incentive to be accurate - a rate that benefits one position could just as easily hurt another in the bank's books.