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Fixed Deposit Home Loan (FHR) 2024: Are They Really Stable?

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If you are new to homeownership and loans, deciding on a home loan rate can make home-buying journey complicated and confusing. In this article, we will talk about one such jargon: Fixed Deposit Home Rate loan, or ‘FHR loan’. It is one of the most popular yet confusing loan types available in the Singapore real estate market.

This article guide will help you better understand what a fixed deposit rate is, how it works, what are its advantages and disadvantages, and whether FHR is the right choice for you.

What is a fixed deposit (FHR) home loan?

In Singapore, a fixed deposit linked home loan essentially refers to a loan package pegged to a particular tranche of the bank’s fixed deposit interest rate, i.e. the rate a bank offers to its customers who put a fixed deposit account with them. It also means that your home loan interest rates will change every time your bank revises its fixed deposit rates.

Also referred to as Fixed Deposit Home Rate (FHR) in the mortgage industry, this loan type is mostly preferred by homebuyers for competitive stability.

Remember not to confuse fixed-deposit home loan rates with ‘fixed-rate home loans’ where the loan interest rates you sign up for stay fixed for a stipulated time, typically two or three years. FHR pegs your home loan interest rate to the fixed deposit rates designated by the bank, unlike a fixed rate home loan where your interest rate stays fixed, for a stipulated time (typically the lock-in period).

Is FHR a board rate?

Unlike a SORA rate, the FHR is considered a type of board rate (although a bit of a hybrid) as it is internally regulated rather than external market conditions. The FHR rate can be adjusted at the bank’s discretion at any time, and you would be at the mercy of the bank. In other words, interest rates appear to be less transparent as banks can alter these rates to their will. However, it does come with an inherent control measure.

While banks can raise or lower the interest rates, they don’t revise them as much. It is because if a bank increases the interest rates for this type of home loan, it would also have to raise the payout to its fixed deposits’ customers. This creates a disincentive for banks to raise interest rates frequently.

How does FHR work?

While it is true to say that a fixed-deposit pegged loan is a double-edged sword for banks, note that banks can still control the ‘spread’ and raise the final aggregate rate. Let’s understand the details to gain more clarity on this.

So, the total aggregate mortgage rate of a home loan consists of the prevailing interest rate on the fixed deposit plus the spread offered by the bank. For example, if the bank commands a fixed deposit rate of 1.90% based on a certain index and the spread is 1.25%, then your aggregate interest rate of your home loan would be:

DBS FHR6 + 1.25% = 3.15%

The first half of the mortgage rate (FHR9) represents that it is pegged to a 9-month fixed deposit rate. This part may change during the loan tenure.

The latter part (in this case, 1.25%) is called the bank margin or spread. This can be seen as the bank’s profits and will not change in a home loan package during the loan tenure.

Note that the FHR loan is unique to DBS. As the concept of fixed-deposit pegged loans became popular, other banks jumped on the bandwagon to offer similar products, but with different names. For example, UOB’s FDPR (Fixed Deposit Property Rate) and OCBC’s FDMR (Fixed Deposit Mortgage Rate).

Theoretically, fixed deposit rate home loans suggest that the cost of funds a bank lends to a borrower would be the same as the interest it pays to its depositors. So, the gross profit the lender makes would depend on the spread (or margin).

Previously, banks like DBS and UOB offered FHR loans with a ‘zero’ spread, which means the total interest rate offered by the bank would be pleasantly low. However, such loans are no longer available in Singapore. All home loan rates in Singapore are now pegged to some kind of index rate (SORA, FHR, and so forth).

Until the end of 2022, banks in Singapore had been postponing significant hikes in mortgages linked to bank board rates. This means these homeowners had been enjoying lower floating rates compared to those tied to the SIBOR/SORA home loans throughout 2022. This situation arose partly because the banks were trying to balance the rising deposit rates and cost of funds against the pressure to increase board rates.

However, this equilibrium was not sustainable indefinitely. With effect from 7 December 2022, DBS made a notable move by raising its FHRs by 1.50% across all tranches. The FHR6 rate, which is the interest rate for a 6-month fixed deposit, was increased to 2.90%. This increase signalled a shift in the market with those on FHR home loans has to start paying close to or above 4% mortgage rate in 2023, matching those on SORA home loans.

What is DBS FHR?

DBS noticed that a lot of homebuyers didn’t trust board rate pegged home loans (which were fully controlled by banks) and that there was a need for a new variant that could build more trust among the borrowers.

In June 2014, DBS was the first bank to successfully introduce the idea of using fixed deposit rates as mortgage pegs. It was offered as an alternative to SIBOR- and SOR-pegged home loans.

When FHR was first introduced, it was calculated by taking the simple average of the bank’s prevailing 12-month and 24-month S$ fixed deposit interest rate for amounts between S$1,000 and S$9,999 or such other sum as the bank may specify. Previously, these rates were at 0.25% (FHR12) and 0.55% (FHR24), thus making the initial FHR 0.40%.

However, DBS subsequently simplified their fixed deposit pegged home loans to follow a single fixed deposit rate such as FHR18, FHR9, FHR8, and FHR24 to the current FHR6. The number next to the FHR indicates the interest rate period. For example, FHR18 means that it is pegged to an eighteen-month average fixed deposit rate and FHR6 is pegged to a six-month average fixed deposit rate.

Note that the higher the number indicated besides FHR, the higher the index rate would be. It is because a longer time of fixed deposits would mean a higher interest earned by the borrower. For example, the DBS FHR9 is 0.25% while its FHR18 is 0.60%.

As observed, each tranche of FHR generally lasts around 18 months or so, till a sufficient number of home loans are pegged to it. It is then closed off, and a new FHR tranche is introduced.

DBS assures FHR to be a steadier and dependable mortgage loan peg, which is less prone to serious fluctuations in interest rate cycles – as fixed deposit rates are said to remain low for longer times. Fixed deposit pegged home loans became so popular in Singapore in 2017 that almost 90% of the home loan customers acquired by DBS had taken this type of loan.

Things to consider when choosing a fixed deposit rate home loan

Here are a few pointers you should keep in mind when choosing a fixed deposit linked home loan:

  • No matter how transparent the fixed deposit interest rates are, remember they are still solely controlled by the bank.
  • Compare interest rates in their entirety – with the spread included. Don’t just stress on the fixed deposit rate your home loan package is linked to!
  • Keep in mind how the interest rates of different home loan packages change after the lock-in period. There are good chances that you may want to look to refinance your home loan after the lock-in period ends.
  • Choose a short/zero lock-in period that allows you to refinance your home loan without penalising you. If you are lucky, you may even get a home loan package with no lock-in at all.
  • Consider picking a local bank as they may have larger deposit volumes as compared to foreign banks, which means they will be less willing to adjust their rates in either direction.

A common question people ask is whether they need to open a fixed deposit account with the bank to get a fixed deposit pegged mortgage. Well, no, you don’t have to open a fixed deposit account to get a fixed deposit linked home loan. It is certainly not a prerequisite, although you can have one, if you like.

Key Differences between SORA loans, Board Rate loans and Fixed Deposit loans

 Board Rate loansSORA loansFixed Deposit loans
Who decides the interest rate?The bankThe median interest rate between at least 12 local banksInterest rate of some of the bank’s fixed deposit products
VolatilityDepends on what and how the bank deems fitMost volatile; interest rate usually changes every one or three monthsRelatively low (as fixed deposit rates don’t change too often)
Major RiskThe bank can change interest rates anytime it wants it likesInterest rates are influenced by several variables, such as the US economyThe bank can change interest rates anytime it wants to (since it is a type of board rate)

Is FHR better than other banks’ board rates?

While your bank can increase fixed deposit rates whenever they want to, the history tells us that any sharp spikes in interest rates are highly uncommon. Not only does it draw the scrutiny of MAS, but your bank will also have to pay out more to fixed deposit account holders. Therefore, your bank is less inclined to raise fixed deposit rates as compared to a pure board rate.

Moreover, the fixed deposit rate is relatively more transparent as the interest rates of fixed deposits are openly advertised on the bank’s website and can be easily tracked over time. So, the customers have the idea of the interest rate to be charged for home loans under the FHR loan. In contrast, board rates lack transparency when it comes to how they are determined, plus board rates are also not advertised anywhere.

It is usually hard for someone who is not financially savvy to choose whether or not board rate loans are a good pick for them. Sometimes they may look more attractive and cheaper than other FHR or SIBOR loans, but you must have full trust in your bank to not adjust their rates suddenly and put you in a difficult situation.

Is FHR better than SORA?

FHR loan packages are relatively less volatile than SORA loans. In comparison, SORA is based on daily projections of interbank borrowing and is known to be the most volatile of the three loan types.

Another thing to note is that although fixed deposit rates tend to move (rise or fall) in tandem with SORA rates, in the case of DBS FHR loans, it happens at a much slower pace. While SORA rates can rise or fall a lot faster, the bank’s FHR does not change as frequently as SORA (which fluctuates every day). Thus, FHR tends to be relatively more stable and less responsive to market rate decreases. This is why FHR loans are relatively less volatile than SORA loans. And when they do change, the change is seldom dramatic.

However, your bank is in full control of the rates you will pay if you have an FHR home loan. On the other hand, SORA rates are determined by taking the median interest rates of 12 local banks in Singapore and change on a daily basis, therefore no one entity has full control over the rates.

Recently, the US Federal Reserve has updated its 2024 interest rate forecast, reducing it to 4.6%, down from an earlier estimate of 5.1%. This adjustment aims to balance a tight monetary policy for controlling inflation with the need to support the economy and reduce job losses. The Fed plans to implement three rate cuts, totalling 0.75%, starting in mid-2024, striving for a ‘soft landing’ to manage inflation while encouraging economic growth.

Since SORA rate is directly influenced by market fluctuations and moves in tandem with the US interest rates, it is expected to perform better in a falling interest rate environment. Therefore, SORA home loans may potentially offer lower interest rates in a declining interest rate environment, like the one anticipated in 2024. So, if you’re willing to take on some risk for potentially lower rates, SORA could be the better choice. But if you are a conservative HDB home buyer looking for stability and predictability but think HDB rates are too high, you might want to go for a fixed deposit linked loan.

Advantages and Disadvantages of fixed deposit-pegged loans

Let’s start with the disadvantages first.

Disadvantages

First, FHR loans are unilaterally controlled by the bank, which can technically set whatever interest rate it wants. If one fine day, the bank decides to double the interest rate from the next month (even if it means incurring a cost by raising their fixed deposit interest rates), it is entirely within their rights to do so. Nothing can stop the bank from increasing it as and when they need to.

Neither the bank needs to explain how it derives the current interest rate nor does it have to justify raising the said rate. Please note that other indexes like SORA rates can’t be increased by a single bank as they are regulated by the MAS (Monetary Authority of Singapore).

There is no means for a borrower to ever know if the quoted FHR is really what it is meant to be. At times, a lot of information is also kept internally within a bank and not released to the public.

Borrowers who choose SORA rates can potentially save a lot of money in a falling rate environment as SORA rates plunge as per the market conditions. However, it is not so for FHR rates. They are unlikely to experience such a windfall as FHR rates do not move drastically in a short period. Similarly, FHR rates spare you from suddenly skyrocketing interest rates.

While the DBS FHR loan is easier to calculate and openly published, it saves you from the stress of dealing with always-fluctuating SORA. However, this isn’t a reason good enough to choose FHR over other loan types.

Advantages

But fixed deposit home loan rates come with a host of benefits too. Since banks have to payout more to their fixed deposit account holders on raising fixed deposit rates, there is a strong enough disincentive for them to increase their fixed deposit pegged home loan rate.

Even if the bank raises the interest rate on FHR loans, they tend to rise slowly than SORA or board rates. Thus, the borrower is spared from frequently rising SORA rates. For further reassurance, the bank may also promise an absolute limit on how high they can raise the rate (an interest rate cap), which applies for a number of years.

History shows that fixed deposit rates have been consistently falling over the past decade or so. Even if it increases in the coming future, the rise will never be drastic. This shows that FHR is relatively more stable than a volatile SORA rate.

Are FHR loans really relatively stable?

When compared to the board rates and SORA, you can say that FHR loans are indeed more stable. How? Since the interest paid on fixed deposit accounts represents a cost to the bank, it will be less motivated towards raising the interest rate on home loans.

But remember, ‘low risk does not mean no risk’. The interest rates can change at any time without needing your approval. For instance, FHR8 was 0.20% when it was introduced in 2018. It reached 0.95% in just over two years. Owing to the pandemic, FHR8 was again revised to 0.60% on 4 May 2020. However, due to rising interest rates, FHR8 reached a high of 3.00% in 7 December 2022!

Note that the FHR as a mortgage peg does not fluctuate or change as much as SORA rates. It typically rises in smaller increments, making a good choice during times when market rates are rising.

However, as per the Fed’s rate-hike pauses and cooling economic data, SORA is expected to maintain a steady level, indicating a plateauing effect. As per the 2024 interest rate predictions, the Fed is expected to cut interest rates later in 2024. In such a situation, those with SORA home loans might be at an advantage and homeowners would be able to save more money. The FHR may also come down eventually but its decline might be more gradual.

Should I take a fixed deposit home loan?

Generally, it is suggested for borrowers to pick a loan based on their current financial situation, risk tolerance and future goals while also considering the interest rate trends.

For example, if you intend to refinance as soon as the lock-in period ends or sell the property in the near term, say five years, then it makes sense to look for what is cheapest as the potential loan rates after 10 years will not affect you. In that case, you can choose a home loan package according to the interest rate environment.

But if you don’t want to get stressed thinking about refinancing in future, you should choose a high FHR with a low spread package against a loan package offering a low FHR with a high spread. This is because the index rate can change over time while the spread will remain the same.

Fixed deposit rate home loans make a good pick for those who want to play it safe – cases where interest rate rises less frequently and in smaller increments. As discussed, fixed deposit rates in Singapore do not fluctuate as much, thus helping to maintain predictability in loan repayments.

It spares you from the guesswork regarding how much you will have to pay for your next monthly repayment. This allows you to better plan your finances.

In a rising interest-rate environment, FHR loans can help homebuyers save more on their monthly instalments. When interest rates rise, banks often offer relatively low fixed deposit home loan packages compared to the rest of the market. In contrast, during a falling or decreasing interest rate environment, which is anticipated in 2024 and beyond, fixed deposit linked rates may leave you at a disadvantage. In such a situation, SORA loans will make a better choice.

For regular homebuyers, buying a property that is still under development is a good way to save money during the initial years, perhaps when they need it the most. FHR loans may also interest property investors.

A landholder could opt for an FHR loan and shell out less interest during the construction phase. Once they receive the TOP (Temporary Occupancy Permit), generally three to four years, they can rent it out and pay off for the added 1% spread with the acquired rental income.

A short term investor who plans to sell the property after the minimum 3-year holding period (to pay Seller Stamp Duty) can benefit from an FHR loan. You can enjoy a lower interest rate for the initial few years (until TOP) and then sell it in the fourth year, thus benefiting from better gains upon resale.

Final Thoughts

Since a home loan mortgage is something that is going to be with you for a very long time (often two to three decades), you must take some time to understand what you are getting into.

From SORA to fixed deposit rates, there are various interest rate indexes, and it is important to understand what they entail in order to find the best home loan in Singapore, based on the current interest rate environment, whether it is a bank loan or an HDB loan.

Before making a decision, you must compare all the available loan packages or take help from professional mortgage consultants to find the cheapest mortgage that meets all your current and future needs.

Some banks, along with DBS, offer fixed deposit rate home loans. If you want to know more about this type of loan or are still unsure about which type of home loan is right for you, consider getting in touch with qualified and professional mortgage consultants from DollarBack Mortgage who can advise you on making a home loan choice that betters the rest of your life.

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