They say that imitation is the sincerest form of flattery. After all, your product must be pretty impressive if it’s going to get copied. We’ve heard of “brands” like “Johnnie Worker Black Labial”, “Pasunnic” and “PolyStation” being churned out on one side of the Pacific, and direct-to-video movies like “Avengers Grimm”, “Age of Tomorrow” and “Atlantic Rim” being filmed on the other side of the same Ocean.
Well, if that’s the case, here in Singapore, DBS should feel very flattered. It’s been slightly over a year since they introduced the DBS Fixed Deposit Home Rate (DBS FHR), their groundbreaking method of determining a home loan interest rate based on the fixed deposit interest rate. The response has been overwhelming. Concerns that the SIBOR would begin a much-dreaded rise dominated the news this year and customers looking for either new home loans or refinancing requests were quickly recognising the DBS FHR as a safer alternative.
So… the DBS FHR isn’t unique anymore?
With such a popular product conquering the market, it was only a matter of time before the other banks jumped on the fixed deposit home loan bandwagon. ANZ tried to introduce the ANZ Combo Plus Package last month, but dropped the idea faster than the WWE erased Hulk Hogan from their history as soon as some racist comments he made came to light.
Now, OCBC has decided to play it safe by offering almost exactly the same product as the DBS FHR – a home loan rate based on their fixed deposit interest rates.
Why is the concept of a fixed deposit home loan so popular?
In the past, the majority of home loan packages were linked to the SIBOR, taking advantage of the ridiculously low rate of less than 0.5%. This year, however, the SIBOR began to climb, crossing the 1% mark, something we haven’t seen in 7 years. Let’s just put it in perspective – 7 years ago, Instagram didn’t exist.
A 0.5% change in interest rate may not seem like much, but when it’s linked to the largest loan you’ll probably ever take in your life, a difference of 0.5% to a $200,000 loan could mean a difference of $1,000 a year in interest.
The idea of a fixed deposit home loan rate, on the other hand, means that if the bank wants to increase their home loan interest rates, they would need to adjust their fixed deposit interest rates as well. In other words, a bank would need to spend money (on their fixed deposits) to earn money (on their home loans) – and we know banks hate spending money, so they’re less likely to raise the rates.
Okay, enough small talk – what’s the deal with OCBC’s new home loan?
Because Singaporeans are really creative about naming things, OCBC’s new home loan is called the OCBC 36-month Fixed Deposit Mortgage Rate, or OCBC 36FDMR. In case it wasn’t obvious, that means that the home loan is pegged to the bank’s 36-month fixed deposit interest rate, which is currently at a low of 0.65%. OCBC claims that rate hasn’t changed since November 2011, but of course, that doesn’t mean that it’s not going to change moving forward.
Like the DBS FHR and the SIBOR, the rate is attached to a fixed spread. These are additional interest charges imposed by the bank. Currently, for the first three years, this is how the OCBC 36FDMR looks: OCBC 36FDMR + 1.03%. To save you the calculation, that means you can expect to pay 1.68% for the first year if you take out a home loan or refinance with OCBC now. (Note: This is for a private property loan. For bank loans for HDB flats, it’s 1.78%)
Hmmmm… seems high. What else should we watch out for?
No matter what formula OCBC uses to calculate their home loan rate, and how transparent their formula is, remember that by signing up, you give them the right to do whatever they want with your home loan. This is because the OCBC 36FDMR is ultimately a board rate – a rate that is internally determined by OCBC. This means that OCBC doesn’t need to rely on external factors to adjust the interest rates, and they can do it as often as they want.
They might just do that, too! By pegging their home loan to the 36-month fixed deposit rate, OCBC is taking a different strategy from DBS, which pegged their FHR home loan to their 18-month fixed deposit rate. Generally speaking, a 36-month fixed deposit rate will always be higher than an 18-month fixed deposit rate. This is because banks will want to encourage customers to deposit funds over a longer period of time.
The key therefore, is to pay attention to the fixed spread.
How does the DBS FHR and SIBOR compare, and what fixed spread is being offered?
Right now, DBS FHR is offering FHR + 1.05% for the first three years. The DBS FHR is based on DBS’ 18-month fixed deposit rate, which is currently at 0.5%, lower than the OCBC 36FDMR. That means you can expect to pay 1.55% for the first year if you take out a home loan or refinance with DBS now.
The 3-month SIBOR is 1.0708% this month, and looks to keep rising. This means that any home loan package linked to it is probably going to exceed both DBS’ and OCBC’s rates in the same amount of time. Just for illustration purposes, even if a bank that offers a SIBOR package has a relatively low fixed spread of about 0.8%, that still means you can expect to pay at least 1.87% for the first year if you take out a SIBOR-based home loan.
But wait… the DBS FHR is still looking good, what’s OCBC doing to compete?
Remember, thanks to the ridiculous property prices in Singapore, you would probably expect to spend all your working life paying off that home loan. That means that you can’t afford to think short term when it comes to home loans. So don’t just go with the home loan package that offers you the lowest interest rates in the first year. The long-term plan is to see how easy it is to refinance that home loan package ones rates get to hot to handle.
OCBC is offering you the option of fixing your monthly instalments as well as a free conversion to reprice to another package anytime the rate increases. In other words, if you find that the OCBC rates ever go up beyond your ability to pay, you can negotiate a new non-FDMR package with the bank without any penalty. That kind of unprecedented safety net puts even more pressure on OCBC not to adjust their rates too drastically. The last thing they want is for all their customers to take advantage of their free conversion.
Who knows, DBS might just do the same for their FHR packages down the road. After all, Imitation is the sincerest form of flattery.