More may opt for mortgages tied to fixed deposit rates

Such loans could spell stability, lower costs in wake of Fed rate hike

The threat of rising interest rates is prompting more home owners to re-finance their mortgages by tying them to fixed deposit rates. PHOTO: LIM YAOHUI FOR THE STRAITS TIMES

The threat of rising interest rates is prompting more home owners to re-finance their mortgages by tying them to fixed deposit rates.

This means the repayment rate is directly related to the interest banks pay customers who deposit cash.

As any bank customer knows, deposit rates have been at rock-bottom levels for several years, but that can spell stability and lower costs for mortgage holders.

Fixing home loans to bank deposit rates is a relatively new option here, with only DBS Bank and OCBC Bank offering the option.

Mortgages are usually pegged to fixed rates or float in step with the Singapore interbank offered rate (Sibor) or swap offer rate (SOR).

Finance advisers told The Straits Times that the DBS and OCBC products could be the most sought after re-financing choice in coming months as the reality of higher interest rates hits home.

Mr Alfred Chia, chief executive of financial advisory firm SingCapital, told The Straits Times yesterday that about 65 per cent of housing loans were still pegged to the Sibor or SOR - mainly to Sibor - as of the third quarter.

But the move last week by the United States to start hiking interest rates will spark a change.

"These borrowers will see a rising Sibor. They will definitely find mortgages pegged to fixed deposit rates more attractive, especially since fixed mortgage rates are also going up," Mr Chia noted. The three-month Sibor is now at 1.137 per cent, up from 1.0009 per cent in mid-October and around three times higher than it was a year ago.

The cheapest fixed-rate package in the market is a United Overseas Bank loan at 1.88 per cent a year for two years but that was recently raised from 1.68 per cent, a sign of the pressure rates are under.

Bankers say loans fixed to deposit rates start to look attractive in this environment. Ms Tok Geok Peng, DBS' executive director of secured lending, said the bank's 18-month fixed deposit home loan package makes up 80 per cent of its new bookings.

DBS has an 18-month fixed deposit home rate, while OCBC offers a 36-month fixed deposit mortgage rate.

Ms Tok said the rate is computed based on the average of the bank's 12-month and 24-month Singdollar fixed deposit rates, which makes it "relatively more stable than market benchmark rates".

DBS' package has a rate of 1.65 per cent a year with a two-year lock-in, but this rate could change.

An OCBC spokesman said the bank expects its 36-month fixed deposit mortgage to be the most popular among all its mortgage products, as it offers the cheapest rates - now at 1.68 per cent a year, with a two- year lock-in.

The DBS and OCBC products have proved the most popular on online personal finance advisory portal MoneySmart over the past six months, said chief executive Vinod Nair. The site draws 700,000 to 800,000 monthly views.

"We can see that 48.8 per cent of our users are keen to take up either (the DBS or OCBC product); 48.5 per cent select fixed rates, with only 2.7 per cent going for floating Sibor packages," he said.

But Mr Chia of SingCapital said there is more than one right choice.

"In my view, having the certainty of fixed rates within the lock-in period is still advisable for many. After all, fixed deposit rates - and hence the mortgage rates tied to them - are not exactly fixed," he said.

Mr Nair, however, said the volatility will be limited: "If interest rates continue to rise, even fixed deposit-linked (mortgage) rates will rise. However, it is safe to say (they) should be lower and less volatile compared with Sibor."

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A version of this article appeared in the print edition of The Straits Times on December 23, 2015, with the headline More may opt for mortgages tied to fixed deposit rates. Subscribe