Jun 18, 2014

    New from DBS: Home loans pegged to bank's FD rates

    DBS Bank has introduced a new benchmark for its mortgages - they are pegged to the bank's fixed deposit (FD) 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 FD rates.

    Called the fixed deposit home rate, or FHR, it takes the simple average of the bank's 12-month and 24-month 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.

    The interest rate charged to customers includes a premium. For Year 1 of the home loan, DBS charges a premium of 0.95 per cent. Add the current FHR of 0.40 per cent, and the effective rate is 1.35 per cent.

    The premium for Year 2 and thereafter is 1.05 per cent and 1.25 per cent respectively. Tag on the FHR, and the effective rate to the borrower in Year 2 and thereafter is 1.45 per cent and 1.65 per cent respectively.

    DBS continues to sell loans pegged to the Singapore interbank offered rate (Sibor), 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.

    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.

    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 rate movements."

    Phang Lah Hwa, OCBC Bank's head of consumer secured lending, said: "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."

    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.