When is “Fixed” Not a Fixed Rate

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fixed rate

When mortgage interest rates are rising, home owners are tempted to switch to Fixed rates.

Home owners tend to baulk at Fixed rate because it is more expensive. They want to take a floating rate package that is cheaper than a fixed rate package and then hope that floating rate will not rise.

When the mortgage interest rate upward trend has been established, the fixed rates would have moved even higher.

Home owners on floating rate packages then start to receive letters from banks informing them of the new increased rates. Many will be shocked and upset.

Floating or Fixed Home Loan rates?

Home owners and property buyers are torn between taking advantage of the cheaper floating rates or securing the stability of the more expensive Fixed rates.

This is similar to choosing an Exciting and fun (guy/girl) versus the predictable, stable but boring (guy/girl).

Many want to have fun and yet want predictability that rates will not rise.

Types of Floating Home Loan Rates available

There are many types of floating rate structures. They are: –

  • Pegged to bank’s internal board rate. (i.e. Board Rate – Discount)
  • Pegged to Sibor Rate. (i.e. Sibor + 1%)
  • Pegged to SOR Rate. (i.e. SOR + 1%)
  • Pegged to Fixed Home Rate (FHR)
    • FHR12 – based on 12 months fixed deposit rates (i.e. FHR12 + 1%)
    • FHR18 – based on 18 months fixed deposit rates (i.e. FHR18 + 1%)
  • Pegged to Fixed Deposit Mortgage Rate (FDMR)
    • FDMR36 – based on 36 months fixed deposit rates (i.e. FDMR36 + 1%)
  • Pegged to Cost of Funds. (i.e. COF + 1%)

It is almost certain many more types of floating rate packages will be created in the future.

Fixed Rate Packages

“Find me a home loan that is fixed. I want a fixed rate for the entire tenure of my loan.” Some property buyers will tell us.

We will ask, “Are you willing to pay 5% interest rates?” and we will hear a shocked property buyer say, “What?”

There are currently no banks that offer a perpetual fixed rate for the entire loan tenure.

Just as that stable, predictable (boy/girl) cannot be as fun and spontaneous as your less-stable but fun (boy/girl). You want the stable, predictable (boy/girl) that is of “marriage” material, but yet want him/her to be fun and stay fun for the rest of his/her life.

Now, how unreasonable is that wish?

Fixed rate packages are typically fixed for between 1 to 5 years of the loan tenure. After the Fixed rate period ends, the subsequent years revert back to floating rates.

Why are Fixed Rates more Expensive than Floating rates?

Fixed rate package are almost always more expensive than floating rate packages.

As banks are unsure of the future interest rate environment, they will need to enter into hedging contracts, which incur a fee, to guarantee you the future rates. It’s like buying an insurance policy against interest rates going crazy.

For example, if the current borrowing cost of the bank is 1.5%. The bank may then decide to create a fixed rate package that is 2% fixed for 3 years.

However, the bank does not know what will happen in year 2 and year 3. What if the cost of borrowing for the bank rises to 3% for year 2 and 3?

This would mean that the bank’s profit would be: –

  • Year 1 = 2% – 1.5% (cost of funds) = 0.5%
  • Year 2 = 2% – 3% (cost of funds) = -1%
  • Year 3 = 2% – 3% (cost of funds) = -1%
  • Total over 3 years = -1.5%

A bank is unlikely to create a product that has a risk of losing money. So banks typically pay a fee to go into a hedging contract.

The bank will buy a hedging product that would guarantee them 2% for year 2 and year 3 and maybe pay a fee of maybe 0.3% to do so. It is similar to insurance.

Hence the bank’s profit would be: –

  • Year 1 = 2% – 1.5% (cost of funds) = 0.5%
  • Year 2 = 2% – 1.5% Cost of funds + 0.3% Hedging cost = 0.2%
  • Year 3 = 2% – 1.5% Cost of funds + 0.3% Hedging cost = 0.2%
  • Total (over 3 years) = 0.9%

A guaranteed profit for each mortgage loan product is probably more important for the bank than the potential to make more money, but also open to the possibility to lose money.

When is a FIXED not a FIXED Rate?

Due to consumer’s fixation on cheap rates, DBS and OCBC have come up with innovative products that bears the word “Fixed”. This is confusing for the consumers, many consumers thought they had gotten a fixed rate package.

DBS calls it Fixed Home Rate (FHR) packages, while OCBC calls it Fixed Deposit Mortgage Rates (FDMR).

DBS’ Fixed Home Rate is pegged to the 12 months Fixed deposit rate and later versions of the FHR is pegged to 18 months Fixed deposit rate.

OCBC’ Fixed Deposit Mortgage Rate is pegged to their 36 months Fixed deposit rates.

FDMR example with OCBC (illustrative purposes only): –

36 months Fixed Deposit Mortgage Rate (FDMR36) for deposit sizes $5,000 to $20,000 = 0.65%

  • FDMR36 + 0.98% = 1.63%

FHR example with DBS (illustrative purposes only): –

18 months Fixed Deposit Rate – “Fixed Home Rate” (FHR18) = 0.6%.

  • FHR18 + 1.25% = 1.85%.

Many people are confused. They tell us they got a 36 months fixed rate mortgage very cheaply. Upon closer investigation and to their horror, it was not a Fixed Rate for 36 months, it’s a Floating Rate package pegged to the 36 months fixed deposit rate.

Is Fixed Deposit Mortgage Rate (FDMR) or Fixed Home Rate (FHR) safe?

Depositors in Singapore are very loyal and risk-averse. Many have the mistaken belief that Singapore banks are safer than foreign banks in Singapore.

In Singapore, depositor’s funds are insured up to $50,000, what this means is, if you are depositing only $5,000 to $50,000, even if that foreign bank goes bankrupt, you will not lose your deposit. (Reference 1)

All Qualifying Full Banks (QFB) and Finance companies are members of the Deposit Insurance scheme (DI scheme), except those exempted by the Monetary Authority of Singapore. (Reference)

A list of banks and financial institutions covered under the deposit insurance scheme are found in Reference 2.

Maybank’s website (Reference 3) indicates 2% for their fixed deposit while CIMB (Reference 4) is paying 1.95% ($20,000 and above) for their 24 months fixed deposit (13 Feb 2016), while OCBC’s 36 month fixed deposit rate ($5,000 to $20,000) pays only 0.65%.

In short, depositors in OCBC or DBS are being underpaid by more than 1% in fixed deposit rates due largely to faith.

The interest rate difference indicates an inefficient market.

When the depositors finally realized that there is no difference depositing with DBS, OCBC or Maybank or CIMB, local banks will have to raise deposit rates or lose their Fixed Deposit funds to other banks who are paying much more interests to depositors.

When that happens, people who are on FHR or Fixed Deposit Mortgage Rate (FDMR) home loans will feel the pain when they receive letters from OCBC.

Perhaps, a surer bet will be to go directly for a Fixed Rate package if the difference is not very much more expensive.

REFERENCES

  1. Singapore Deposit Insurance Corporation Ltd, https://www.sdic.org.sg

Excerpts:

“All full banks and finance companies in Singapore are required to be members of the Deposit Insurance Scheme.” “So a foreign bank which has a full-banking license would be included under the Deposit Insurance Scheme.”

“all insured deposits placed with that member, except for deposits under the CPF Investment Scheme and CPF Minimum Sum Scheme, are aggregated and insured up to S$50,000. If you are a sole proprietor, your personal eligible accounts will be aggregated with the eligible accounts of your sole proprietorship(s). Trust and client accounts held by non-bank depositors are insured up to S$50,000 per account, without aggregation.”

  1. List of banks covered under Singapore Deposit Insurance Corporate Ltd, https://www.sdic.org.sg/di_scheme_members.php

Banks

  • Australia And New Zealand Banking Group Limited
  • Bangkok Bank Public Company Limited
  • Bank of America, National Association
  • Bank of China Limited
  • Bank of East Asia Ltd
  • Bank of India
  • Bank of Singapore Limited
  • Bank of Tokyo-Mitsubishi UFJ, Ltd
  • BNP Paribas
  • CIMB Bank Berhad
  • Citibank NA
  • Citibank Singapore Limited
  • Credit Agricole Corporate and Investment Bank
  • DBS Bank Ltd
  • Far Eastern Bank Ltd
  • HL Bank
  • Hongkong and Shanghai Banking Corporation Limited
  • Industrial and Commercial Bank of China Limited
  • ICICI bank Limited
  • Indian Bank
  • Indian Overseas Bank
  • JPMorgan Chas Bank, NA
  • Malayan Banking BHD
  • Mizuho Bank, Ltd
  • Oversea-Chinese Banking Corpn Ltd
  • PT Bank Negara Indonesia (Persoro) TBK
  • RHB Bank Berhad
  • Standard Chartered Bank
  • Standard Chartered Bank (Singapore) Limited
  • State Bank of India
  • Sumitomo Mitsui Banking Corporation
  • UCO Bank
  • United Overseas Bank Ltd

Finance Companies

  • Hong Leong Finance Limited
  • Sing Investments & Finance Limited
  • Singapura Finance Ltd
  1. Maybank, Singapore Dollar Time Deposit, http://info.maybank2u.com.sg/personal/deposits-banking/time-deposits/singapore-dollar.aspx?
  1. CIMB SGD Fixed Deposit Promotion, http://www.cimbbank.com.sg/en/personal/news-and-promotions/promotions/accounts/cimb-sgd-fixed-deposit-promotion.html

 

ABOUT THE AUTHOR: 

 

Paul holds an a B.Eng(Hons) Aberdeen University (UK) and a Masters of Business Administration (MBA) from a Macquarie Graduate School of Business (MGSM) Australia. He also serves as current President of Macquarie University Alumni Association of Singapore and Hon. Secretary of British Alumni. He is founder of www.iCompareLoan.com, his articles have been syndicated/featured on STproperty, iProperty, BTInvest, TheEdgeProperty, Propwise, Propquest, Yahoo and TheOnlineCitizen amongst many other sites. He has also given speeches, guest speeches, trainings and/or seminars at NUH Lunch time talk, iProperty, David Poh and Associates, Getty Goh’s Ascendant Asset property, NTU (Guest Lecture on SEO), Panel discussions at GPS Alliance, C&H, Skillup just to name a few. He is passionate about helping people enhance their wealth and in making money work harder for them.

 

 

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Mortgage Options in Singapore – The Difference between Fixed and Variable Rates

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You’re ready to buy your first home in Singapore, and now you need to figure out a mortgage and what type is best for you. There are over twenty banks in Singapore that sent out fliers and packets, and the wealth of information can feel overwhelming to buyers as they try to decide what type to go with. Portals like PropertyGuru can help you understand the differences between the types of mortgages for housing in Singapore. The types of mortgages can be broken down into three different categories:

•    Fixed rate

•    Variable Rate (floating)

•    Interbank Market Pegs (IMP)

Fixed Rate

A fixed rate mortgage, also known as a conventional mortgage, is a rate for payment that is set for a specific amount of time. You can get them done for periods of time, such as one, two, or three years. Once the fixed period for the rate ends, the loan will revert to a variable rate.

A fixed rate mortgage means that how much you pay each month won’t change for the period that you choose to go with. If you decided on a three-year fixed mortgage, then your payment amount won’t change at all in those three years. This means that you won’t have to worry about your rates going up without much notice.

During the term of the fixed rate, most banks will require that you stay with them. This means you can’t go to other banks to see if you can get a better deal in that time. You must wait until the term is over with before you can see if you want to change banks.

Since the rates stay fixed, the homeowner cannot take advantage of any changes in rates during the fixed period. You will also end up paying higher interest rates with this type of mortgage.

Variable Rate

Also known as adjustable-rate or floating rate mortgages, variable rate mortgages depend on the bank’s Board Rate (BR) minus the discount they are willing to give to the homeowner. Variable rate mortgages usually offer lower interest rates to homeowners.

The downside is that the rates for your payments can change with barely any warning. In some cases that could mean a lower cost, but it can also mean that at times you might have a much higher cost to pay. This type of loan will save you quite a bit in interest over time in the life of the mortgage, however.

If you make the choice to go with a variable rate mortgage, you will want to check a few different banks, as the rate will change from one bank to another.

Interbank Market Pegged and SIBOR/SOR

These are a form of variable rate mortgages but with more transparency for the borrowers, as the rate is connected to the interbank market rate.

•    SIBOR stands for Singapore Interbank Offered Rates, which is a rate that the banks use when lending money to each other. This rate is publically available to borrowers. You can choose different lending periods, from one month, three months, six months, and twelve months. If the three-month rate is used, then every three months the rate will be reviewed and adjusted.

•    SOR, which stands for Swap Offer Rate, works in much the same way, with a slightly higher rate because it is based on the exchange rate from the U.S. to Singapore currency. When SIBOR’s rates go down, then what you will be paying for SOR will be better, but the rates for it can go much higher when SIBOR is up at its peak. SOR is considered unpredictable and more volatile, so many borrowers have moved away from using them, instead choosing to go with SIBOR.

Deciding which of these is Right for You

Now that you know about the different types, how are you able to decide which is best for you? Deciding on the loan will depend on how you want your payments to work.

If you want your monthly payment to remain the same or you can’t have the chance of the rate going up, then you’ll want to go with a fixed rate mortgage. This will keep the payments stable, and you can plan your finances around that rate.

If you want to be able to take advantage of the changes in rates, allowing that some months will be lower even if others are higher, then variable rate mortgages are best. If you go through a bank, they are more stable than the market-pegged, and the bank will notify you thirty days in advance of changes.

If you are particularly savvy and knowledgeable in interest rates and how they work, then you might consider going with market-pegged. While less stable, a savvy property owner could take full advantage of the lower rates to save money.

Take your time and check the different banks to find what is right for you.

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How to spend your GST Vouchers

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Paul HO (iCompareLoan.com)

In July 2015, 1.6 million Singaporeans will receive a letter to inform them of their eligible GST Vouchers and other Budget benefits. However will you qualify for the GST vouchers?

The GST Vouchers will be given out in 3 components:

  • Cash
  • Medisave
  • U-Save

GST Voucher – CASH

You will get between $150 to $300 dollars as long as you meet the following Criteria: –

Assessable Income for YA2014 up to $26,000

  • Annual Value of Home as at 31 Dec 2014 (Up to $13,000) = $300.
  • Annual Value of Home as at 31 Dec 2014 ($13,001 to $21,000) = $150.

The assessed annual value of $21,000 of homes would cover almost all the HDB units as well as some lower priced private properties according to Ministry of Finance.

GST Voucher – Senior Bonus

For older folks aged 55 to 64 with assessed income not exceeding $26,000: –

  • Annual value of home as at 31 Dec 2014 (Up to $13,000) = $300.
  • Annual value of home as at 31 Dec 2014 ($13,001 to $21,000) = $150.

For older folks aged 65 and above with assessed income not exceeding $26,000: –

  • Annual value of home as at 31 Dec 2014 (Up to $13,000) = $600.
  • Annual value of home as at 31 Dec 2014 ($13,001 to $21,000) = $150.

GST Voucher – Medisave

You must be a Singapore citizen residing in Singapore and be aged 65 and above in 2015. And the annual value of your home must not be above $21,000.

Annual Value of home as at 31 Dec 2014 – up to $13,000

  • Age in 2015 – 65 to 74                    = $250
  • Age in 2015 – 75 to 84                    = $350
  • Age in 2015 – 85 and above          = $450

Annual Value of home as at 31 Dec 2014 – between $13,000 to $21,000

  • Age in 2015 – 65 to 74                    = $150
  • Age in 2015 – 75 to 84                    = $250
  • Age in 2015 – 85 and above          = $350

How can you use these Medisave Topups?

There is almost no possibility for you to withdraw your GST Voucher – Medisave as many people who are eligible for these topups are lower income earners who likely do not meet CPF Minimum sum. Coupled with the complicated CPF withdrawal rules and Medisave Minimum Sum making withdrawal almost impossible.

You must be sick to use your Medisave. And we all know that medical care is exorbitant. A government hospital C-Class ward charges ~ $200 per day before subsidy. With 8 to 10 beds in a small room, you are talking about a $1600 to $2000 per room per night. Easily the price of a 3 to 4 star hotel’s luxury suite. This is how expensive public health care has become.

GST Voucher – U Save

Again, there is no money in this voucher except to offset the Utilies bill. These are given out 4 times a year.

 GST Table 1

 

Table 1: Ministry of Finance, GST Voucher – U Save.

When will I receive my GST Vouchers

You will receive your GST Voucher − Cash and/or Medisave in August each year that you qualify. If your household qualifies, you will receive your GST Voucher − U-Save in January, April, July and October each year.

 

 

What can you do with your GST Voucher – CASH?

Since we have already established that you will not get much money in the form of Cash. You will have to contend with just $150 to $300 if you meet the criteria and are below 55 years old.

If you are above 55 years old, you have an extra one-time senior bonus of between $150 to $600.

For Age groups – 21 to 30

If you are not yet married and staying with your parents, you will receive $150 to $300 depending on the type of housing.

In any case these are costs to help offset higher cost of living and GST. Many young adults these days are in debt, use this money to pay down your debt or buy a book about self improvement. If you really have to go out, here is what you can do: –

Places to go for 2 people for an entire day: –

You can consider taking a trip for two to the Sungei Buloh Wetland Reserve with your family and friends. Remember to pack your sandwiches and bring a few bottles of water. Take a bus ride there, have a nice walk. Enjoy an afternoon of fun outing that does not burn a hole in the pocket. (Estimated $20-$30 including food, water and bus rides)

Go home for a shower and you can head out to Geylang for some coffeeshop fare and splurge on some nice Durian. Many people love durian. Durian is more abundant this year and cheaper, but that should still set you back by $30 to $50.

If you are still not tired, head out to watch a movie at the Cinema and buy some popcorn. That should set you back by $30.

Total cost $100 to $110.

You can save the rest.

For Age groups – 30 to 54

Let’s just say you have more burden on your shoulders. You could perhaps have children who are going to school that needs money for everything.

Whatever you can save is money earned. You could go to an online comparison site such as www.DiffMarts.com to find the cheapest food in each of the supermarkets the latest offers or promotional prices.

 GST Shopping List1

SHOPPING LIST 1: A shopping cart containing products from different marts (Source: www.DiffMarts.com)

With DiffMarts.com you can afford to buy more as you can pick out the cheapest of each item from different supermarkets.

After treating your family to a sumptuous home cooked meal, you could still have money to spare, how about going online to watch a movie on your laptop computer or rent a DVD movie and have your family watch it together. There is no better way than to enjoy it together as a family.

 

For Age groups – 55 onwards

If you are in this age group, you are not likely to read this article online. Younger family members please share this with your parents. What can you do with your $150 to $300 GST Voucher – Cash and Senior Bonus ranging from $150 to $600 one-time cash.

What can you do with $300 to $900?

Let’s face it, you are probably still working and have a lot of commitment. And you cannot afford to fall sick. Your joints start to creak, your heart weakens, you may have hypertension or high blood pressure, your bones becomes brittle and your eyes start to strain. If you have not started on a healthy lifestyle, its not too late to start eating healthy and exercising and giving yourself the right vitamins now. Buy a book about healthy living, cooking the right food and exercising.

Here is a sample of how much it would cost you: –

       GST Watsons

You can save up the rest of the money for books, groceries, or buy yourself a pair of jogging shoes and some exercise shirts.

Conclusion

The main aim of the GST Vouchers is to offset against GST cost. It is best that you do not treat this as a windfall and hence use this money sparingly for necessities. I get particularly nervous whenever the government gives us money. If you noticed, whenever we get vouchers or rebates, next comes the price increases. A case in point is the Pioneer package only to be followed by Polyclinic fees increases. In short, for younger people, spend on self-improvement and dating, middle age people spend wisely on groceries and seniors to spend on healthy lifestyle and vitamins.

References: –

1. Ministry of Finance, General Information on GST Voucher scheme, https://www.gstvoucher.gov.sg/Pages/faqs.aspx

What does iCompareLoan.com do?

 

www.iCompareLoan.com is a Loan Portal and a Mortgage & Loan broker, helping property buyers and home owners to get the best fit home loan and business owners obtain Business loans for business expansion.

Home Loan Report ™ is Singapore’s first Cloud based Home Loan Report ™ platform to be used by Property agents, financial advisors as well as other Mortgage brokers to prepare reports for their customers.

Home Loan Report ™ – Enterprise allows a property agent’s website to immediately add a loan section. Improve your Google Ranking, let’s viewers increase Time-on-site. Property or Finance sites that deployed Home Loan Report ™ – Enterprise loan section sees viewers stay on their site longer by between 30% to 350% after 4 to 8 weeks of installing the Embedded Loan Plugins.

About PAUL HO:

Paul holds an a B.Eng(Hons) Aberdeen University (UK) and a Masters of Business Administration (MBA) from a Macquarie Graduate School of Business (MGSM) Australia. He also serves as current President of Macquarie University Alumni Association of Singapore and Hon. Secretary of British Alumni.

He is founder of www.iCompareLoan.com, his articles have been syndicated/featured on STproperty, iProperty, BTInvest, TheEdgeProperty, Propwise, Propquest, Yahoo and TheOnlineCitizen amongst many other sites. He is passionate about helping people enhance their wealth and in making money work harder for them.

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Continue Reading How to spend your GST Vouchers