Will Fixed Rate Home Loans From DBS, UOB and OCBC fall further in 2023?

In 2022, the global financial landscape witnessed significant shifts as central banks raised interest rates to combat surging inflation. Singapore was no exception to this trend, with local lenders like DBS Bank, OCBC Bank, and UOB raising their fixed interest rates for home loans.

As a result, these rate hikes caused home loan rates to breach the 4% mark, impacting borrowers seeking stable mortgage options. However, it was followed by an intriguing reversal in 2023, with banks gradually reducing their fixed interest rates on home loans in response to shifting market dynamics.

This article delves deep into the dynamic changes in Singapore’s fixed-rate home loan offerings that will help prospective and existing homeowners make informed decisions. It explores how central bank policies, global economic conditions, and competition among banks have led to a favourable environment for borrowers seeking stable and predictable mortgage options.

Understanding Fixed Interest Rates

Fixed rate home loans in Singapore provide borrowers with a stable and predictable path for their mortgage payments over a specific period, typically two to five years. It usually depends on the chosen home loan package.

During this fixed-rate period, borrowers enjoy the assurance that their interest rate remains constant, offering valuable consistency for budgeting and financial planning. This stability shields homeowners from the fluctuations of the broader financial market.

However, it’s essential to recognise that once the fixed interest rate period concludes, the loan’s interest rate shifts to a floating rate. This floating rate is usually linked to benchmark rates like the Singapore Overnight Rate Average (SORA), Fixed Deposit Rate (FHR), or Board (MBR) rates.

Therefore, while fixed interest rates provide short-term certainty, borrowers must be mindful of potential changes in interest rate trends after the fixed period ends, which could result in higher or lower mortgage costs. In essence, fixed interest rates in Singapore offer a balance between stability and the potential for future adjustments in line with market conditions.

The Rise and Fall of Fixed-Rate Home Loans in Singapore in 2023 and Beyond

Rate Hikes and Their Impact

The year 2022 witnessed a global financial landscape in flux as central banks worldwide responded to surging inflation by engaging in a rate-hike race. Singaporean banks swiftly countered these monetary policy shifts by adjusting their lending rates upwards.

The consequence was a notable breach of the 4% mark in home loan rates across Singapore. Leading the charge were prominent local lenders like DBS Bank, OCBC Bank, and UOB, which increased their fixed-rate home loan packages in November 2022.

The Initial Surge and Subsequent Decline

But the tale of fixed-rate home loans in Singapore did not end there. At the onset of 2023, a pivotal transformation unfolded. The U.S. Fed Reserve indicated a potential pause or even a reversal of its policy tightening, triggering a significant change in the landscape.

Local banks, responding to shifting market dynamics, began to cut their fixed interest rates on home loans. This change marked a crucial turning point for homeowners, particularly those searching for stability in their mortgage payments.

Key Players and Their Rate Adjustments

Let’s look at how the fixed rates of Singapore’s big three local banks – OCBC, DBS and UOB changed from December 2022 to Q4 of 2023.

i. OCBC’s Competitive Rates

In Q4 2023, OCBC Bank introduced promotional rates of 3.00% for one- and two-year fixed-rate mortgages to attract potential borrowers. It marked a significant drop from the rates of 4.25% and 3.9% for the same loans in December 2022.

ii. DBS Bank’s Notable Decrease

DBS Bank, a major player in the Singaporean banking landscape, also made significant adjustments to its fixed-rate packages. In December 2022, DBS offered fixed-rate packages at 4.25% per annum, with tenors of two to five years.

However, by Q4 2023, the bank also revised its fixed-rate packages to as low as 2.95% per annum, with a lock-in period of 2 years. This reduction from their January offer of 4.25% presented an attractive proposition for borrowers seeking stability.

iii. UOB’s Adjustments

Among the three local banks, UOB initially had the highest fixed-rate home loans, offering a two-year fixed-rate package at 4.5% per annum in December 2022. However, UOB softened its fixed rates for two- and three-year home loans to 3.05% by end- Sept 2023. This gradual decline in fixed rates may continue, creating an opportune moment for individuals seeking stable mortgage options.

At the time of writing this article (October 2023), these are the latest fixed home loan interest rates offered by some of the biggest banks in Singapore (do note lower rates may be offered):

	OCBC	DBS	UOB
1-year fixed-rate	3.10%	NA	NA
2-year fixed-rate	3.10%	3.10%	3.10%
3-year fixed-rate	3.45%	3.45%	3.45%
4-year fixed-rate	NA	3.75%	NA
5-year fixed-rate	NA	3.75%	NA

Foreign Banks and Their Response

Even foreign banks like Standard Chartered Bank, Citibank and HSBC made slight downward adjustments to their fixed home loan rates.

i. Standard Chartered and Citibank

Standard Chartered’s two-year fixed rate packages decreased from a peak of 4.5% in late November to 3.05% in Oct 2023.

Similarly, Citibank lowered its two-year fixed rate home loans for Citigold members, with a minimum loan size of $800,000, from 4% in December 2022 to 3.05% in Oct 2023. Property experts anticipate this reversal in the uptrend to persist.

ii. HSBC’s Competitive Offer

HSBC joined the trend by reducing its two-year fixed-rate mortgage to 3.05%, while the three-year equivalent was set at 3.65%. Both packages were offered at 4.25% in December 2022.

These adjustments highlight the competition among banks and the potential for further softening of fixed rates.

The Trajectory of Fixed-Rate Mortgages in Singapore 2023

Major local banks like DBS, OCBC, and UOB, along with foreign banks such as Standard Chartered, Citibank, HSBC and Maybank have all responded to changing market dynamics by reducing their fixed interest rates on home loans.

For example, the 2-year fixed-rate mortgages peaked at 4.25% in December 2022 but took a slow, gentle downtrend. The interest rates retraced to 3.75% by March, 3.50% by June, and 3.00% by October 2023. Interest rates may drop to 2.90% for substantial loans exceeding two million.

This downtrend shows a significant shift in the Singaporean fixed-rate home loan market, suggesting that fixed rates could potentially dip below 3% before the year concludes. It provides an advantageous environment for borrowers to secure competitive fixed rates for shorter periods, typically two to three years, before transitioning to floating rates linked to benchmark rates like SORA or FDR.

What are the factors causing a decline in fixed home loan rates?

1. Softer Inflation and Employment Data in the United States: The decline in fixed interest rate movements can be attributed to several factors, foremost among them being the economic conditions in the United States. Softer inflation and employment data in the U.S. have prompted the Fed to adopt a less aggressive monetary policy stance.

This shift in the Fed’s posture has contributed to a decline in global interest rates, including those affecting Singapore’s fixed-rate home loans.

2. Fluctuations in the SORA: Another factor influencing the decline in fixed interest rate movements is the fluctuation of the SORA. SORA is a benchmark rate for many financial products, including home loans, in Singapore. When the SORA benchmark rate experiences fluctuations, it impacts the overall interest rate environment.

SORA’s movements are influenced by various factors, including market demand for funds, liquidity conditions, and central bank policies. These fluctuations can lead to adjustments in banks’ lending rates, affecting the trajectory of fixed interest rates on home loans in Singapore.

3. The role of hedging costs. Fixed-rate mortgages tend to experience more substantial adjustments due to banks considering their hedging costs. These costs depend on market expectations for interest rates and fluctuate accordingly. When interest rates go downwards, hedging costs decrease. It allows banks to offer more competitive fixed-rate packages.

In contrast, floating-rate home loans, where interest rates vary throughout the loan’s life, are not subject to these fluctuations, as any increase is passed on to consumers. Currently, all three local banks’ home loans are pegged to the three-month compounded SORA. Property experts anticipate that fixed rates will continue to soften in response to these factors.

What are the future expectations in fixed interest rate movements?

While fixed home loan rates have become more attractive for now, homeowners must consider future interest rate movements. Fixed-rate packages typically have a minimum lock-in period of two to three years. Market expectations indicate that interest rates may start declining from early 2024, potentially dropping below current fixed-rate levels.

Therefore, borrowers should consider loans with fixed rates for one or two years, aligning with expectations of Fed rate cuts from 2024 onwards.

Some banks even offer a two-year fixed-rate home loan with the flexibility to convert to any other interest rate option after the first year. Borrowers are encouraged to seize the current market conditions and explore opportunities presented by declining interest rates on fixed-rate home loans in Singapore.

How does competition among banks for fixed rates benefit home buyers?

Competition among banks for fixed-rate home loans in Singapore is a boon for home buyers as it empowers them with a range of choices and the potential for cost savings. Firstly, it directly translates into more competitive interest rates.

Banks strive to outdo each other by offering lower fixed rates to attract borrowers. It means that home buyers can secure mortgages with more attractive terms and potentially lower monthly payments, saving them money over the life of the loan.

Secondly, the competition extends to favourable loan terms. Banks may offer more flexible repayment schedules, waiver of penalties, or reduced lock-in periods, allowing borrowers to tailor their loans to suit their financial circumstances and goals.

Lastly, intensified competition often leads to additional benefits. Banks may provide perks such as cash rebates, fee waivers, or bundled insurance packages, further sweetening the deal for home buyers.

Critical Factors for Assessing Fixed Interest Rate Home Loans

There are several factors to consider when evaluating the latest fixed interest rate offerings in Singapore for 2023:

1. Current Market Conditions

The state of the global and local economy greatly influences the banks’ interest rates. In 2023, keep an eye on economic indicators, such as inflation rates, employment figures, and Fed Reserve policy updates, as they will impact the interest rates banks offer. In times of economic uncertainty, banks may offer lower fixed rates to attract borrowers.

2. Interest Rate Trends

Understanding how rates have fluctuated in the past can help you make a more informed decision about whether to lock in a fixed rate or choose a floating-rate home loan. Locking in a fixed rate may be prudent if rates have been rising.

3. Comparison between Fixed Rates Across Banks

Different banks in Singapore will offer varying fixed-rate home loan packages. It’s essential to compare these rates and understand the terms and conditions associated with each offering. You can take advice from a mortgage consultant or financial advisor to help you navigate the options and negotiate the best deal.

4. Lock-in Period

Fixed-rate mortgages often come with a lock-in period, during which you are obligated to keep your mortgage with the bank. Exiting the mortgage during this period may result in penalties. Make sure you understand the lock-in period terms and associated costs before committing. Also, if interest rates fall during the lock-in period, you will miss out on the opportunity to save money on your mortgage repayments.

5. Prepayment and Repricing Options

Check if the fixed-rate mortgage allows for partial or full prepayments without incurring substantial penalties. Having the flexibility to prepay can be advantageous if your financial situation improves or interest rates drop further. Additionally, inquire about the option to reprice your home loan during the fixed-rate period if better deals become available.

Additional tips for homeowners considering a fixed-rate home loan

• Explore multiple lenders to find the best fixed-rate home loan deal, as rates and terms vary significantly between institutions.

• Assess your current financial status and long-term objectives to determine whether a fixed-rate home loan aligns with your financial strategy.

• Understand and factor in any upfront fees, ongoing charges, or penalties related to the fixed-rate home loan to avoid unexpected costs.

• Decide on the duration of your fixed rate (e.g., 1, 2, 5 years) based on your outlook for interest rates and your own financial stability.

• Scrutinise the fine print of your loan agreement, including any restrictions, prepayment options, or special conditions, to ensure you fully comprehend the terms of your fixed-rate home loan.

Final Thoughts

In conclusion, staying informed about the dynamics of fixed-interest rate home loans is crucial for Singaporean homeowners in 2023. From the initial surge in rates driven by central bank policies to the subsequent decline influenced by global economic conditions and bank competition, borrowers have witnessed a significant shift in the fixed-rate mortgage landscape.

As the competition among banks in Singapore continues, borrowers can expect more attractive fixed-rate home loan options with more competitive terms. While the current property market conditions favour those seeking stability in their mortgage payments, homeowners must carefully consider future rate movements and the lock-in periods associated with fixed-rate packages.

Dollarback Mortgage, one of Singapore’s premier mortgage brokers, is dedicated to providing professional advice. Our team of experienced mortgage consultants can assist you in comparing the best housing loan interest rates in Singapore.