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Cheryl Ong
Monday, Jun 23, 2014

Business

Fixed deposit rates versus Sibor: Win, lose or draw?

The Straits Times | Cheryl Ong | Monday, Jun 23, 2014

Home buyers have the option of taking loans based on Sibor or FHR. Although the difference in interest charged is currently small, the benefit of FHR-pegged loans kicks in when there are fluctuations in the economy.

Home buyers who like the certainty of a more fixed mortgage rate have another option to consider in the form of a new package rolled out by DBS Bank.

Its fixed deposit home rate, or FHR, is pegged to the bank's fixed deposit interest rate and not the Singapore Interbank Offered Rate, commonly known as Sibor.

Sibor reflects the day-to-day money market and so can fluctuate, especially in volatile financial periods.

That means mortgages pegged to it are exposed to the same movements.

The new DBS package aims to iron out many of these potential ups and downs and reduce the anxiety for some mortgage holders.

The FHR, which is now at 0.4 per cent, is derived by calculating the simple average of the bank's 12-month and 24-month fixed deposit interest rates.

A premium, known as the spread, is tacked on, resulting in the final interest charged. So if the spread for the first year is 0.95 per cent, it adds up to an effective interest rate of 1.35 per cent (0.4 + 0.95).

So the question for home buyers comes down to: Sibor or FHR?

At first glance, a simple experiment with a mortgage calculator shows the difference to be negligible.

A 30-year-old taking out a mortgage of $500,000 for 30 years will have to fork out $1,690 a month in the first year of an FHR loan or $1,762 a month if he takes up OCBC Bank's or United Overseas Bank's (UOB) Sibor package - a difference of only $72.

But the real benefit of FHR kicks in when there are fluctuations in the economy.

The Sibor has stayed abnormally low as a result of sluggish growth in the United States since the 2008 global financial crisis.

The three-month Sibor, which is the common rate offered, now stands at 0.403 per cent. It has remained low since September 2011, creeping up by just 8 per cent, according to Bloomberg filings.

This makes Sibor-linked loans attractive propositions and is a reason for their popularity, noted Ms Phang Lah Wah, who is head of consumer secured lending at OCBC.

But Mr Sean Lim, founder of mortgage portal FindaHome-Loan.sg, pointed out: "Compared with fixed deposit rates, the Sibor is likely to fluctuate more since it is re-priced every day and dependent on the daily demand and supply of liquidity."

The three-month Sibor was 1.32 per cent during the 2008 financial crisis, well up on DBS' fixed deposit rate which at that time was 0.88 per cent.

So the FHR might be better although this does not mean that it is immune to fluctuations.

Mr Dennis Khoo, head of personal financial services at UOB, noted that fixed deposit rate loans are subject to change at the bank's discretion.

And the FHR is also related to the Sibor, since both are essentially interest rates. So if US growth picks up, said CIMB regional economist Song Seng Wun, the Sibor will rise and fixed deposit rates will invariably follow suit since local interest rates track those in the US.

Despite this, analysts say DBS has the ability to keep the FHR low. Fixed deposit rates, which are essentially the cost of its funds, are less likely to rise significantly as the bank already holds an estimated 26 per cent of Singdollar deposits - the lion's share of the market.

However, it seems an even fight between both options if borrowers consider the premiums that are tacked on.

While the premiums charged for FHR loans are higher than those offered for most Sibor packages, it is no secret that they can be negotiated, especially for big loans.

The FHR charges a premium of 1.25 per cent in the third year of the loan. OCBC's Ms Phang said premiums of "preferential rates" for Sibor customers may be as low as 0.85 per cent. So if the gap between the benchmarks does not widen significantly, Sibor borrowers could end up with a better deal.

DBS says that one benefit of the FHR is its transparency, but in the Internet age, the same can be said of Sibor rates, which can be easily tracked on mobile devices or the Monetary Authority of Singapore's website.

So perhaps the track record of fixed deposit rates may be the clincher.

CIMB's Mr Song expects interest rates to climb noticeably from the second half of next year, which could leave the Sibor above 1 per cent by the end of next year and even at 2 per cent by the end of 2016.

It boils down to a matter of "perceived stability", as Mr Vinod Nair, chief executive of finance portal MoneySmart.sg, puts it. The FHR loan, with DBS' history of low fixed deposit rates and solid base of deposits, will have that on its side.

ocheryl@sph.com.sg


This article was first published on June 21, 2014.
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