More home buyers opt for fixed-rate loans

[SINGAPORE] Interest rates are rising and home buyers are taking cover.

One in two home buyers took up fixed-rate loans from DBS Bank this month, up from 30 per cent earlier in the year, the bank said.

This is a shift. Anecdotal evidence has it that an estimated 70 per cent of home buyers have been going for floating-rate loans, with interest rates having plunged to historical lows following the 2008 Great Financial Crisis.

The key three-month Sibor (Singapore interbank offered rate) has risen to 0.40568 per cent, up 0.9 per cent from last Thursday, when US Federal Reserve chair Janet Yellen said interest rates could rise earlier than expected.

At the currrent level, the three-month 0.40568 per cent, which is pegged to most floating-rate home loans, is up 9.3 per cent from almost a year ago; its 52-week low of 0.37083 per cent was on April 11, 2013.

Lui Su Kian, DBS Bank's managing director and head of deposits and secured lending, said: "We expect interest rates to increase gradually."

The increase in Sibor after last week's Federal Open Market Committee (FOMC) meeting reminds home buyers that rates can change quickly in reaction to market events and that the best time to lock in an attractive set of rates is when a low-interest environment is prevailing, she said.

"With concerns over rising interest rates, more buyers are enquiring about our fixed-rate programmes," she said.

DBS has two fixed-rate programmes - three or five years. It is the only bank to have introduced a promotional rate of 1.88 per cent for its five-year fixed-rate programme since last November, said Ms Lui.

DBS has another hybrid fixed-rate package, but that is only for HDB home buyers.

Its POSB HDB Loan caps the borrower's interest rate at 2.50 per cent (the prevailing CPF concessionary rate) for the first eight years of the loan, and is always 0.10 per cent lower than HDB's concessionary loans.

The POSB HDB Loan charges 1.38 per cent plus the three-month Sibor, which works out to 1.7857 per cent at the moment.

Based on the prevailing pricing, borrowers will thus enjoy protection when the three-month Sibor rises above 1.12 per cent, said Ms Lui.

Since last September, 80 per cent of HDB refinancers have been opting for the POSB HDB Loan, said a DBS spokeswoman.

They can opt for the five-year fixed rate, 1.88 per cent package, but they prefer the certainty of eight years, said the spokeswoman.

The CPF Ordinary Account rate of 2.50 per cent has remained unchanged since July 1999. That was when the formula to compute the rate was changed to 80 per cent fixed deposit rate and 20 per cent savings rate of the average of the major local banks over the preceding relevant three months.

The Business Times understands that home loan customers at the other two local banks have been slower in taking up fixed-rate packages, which could be due to less competitive pricing.

In addition to Sibor plus packages, OCBC Bank and United Overseas Bank offer variable interest rate loans tied to their bank board rate, which is more stable that the Sibor rate.

For instance, OCBC's 4.50 per cent board rate has been unchanged since 2006.

Phang Lah Hwa, the bank's head of consumer secured lending, said: "We have observed an increasing number of people enquiring about fixed-rate packages."

The bank's variable interest rates package offers some level of stability, as it is based on its board rates and the bank has to inform customers of changes 30 days in advance, she said.

Dennis Khoo, United Overseas Bank's head of personal financial services, said that with every market cycle, there will be different views on the best home loan option for home buyers. "What's important is for home buyers to choose the home loan option that best suits their financial needs," he said.

Home loans pegged to Sibor enable home buyers to capitalise on the current low interest rate, but this rate will vary along with interest-rate movements, he said.

"In a rising interest rate environment, one alternative home buyers can look at is floating board rate loans, which offer more stability than Sibor-pegged loans, as the impact of changing interest rates is not immediate," he added.

These packages also give home owners the flexibility to make partial repayments at no additional cost, he said.