Fixed rate home loans: Is now the best time to get one?

Fixed rate home loans: Is now the best time to get one?

This article was originally on GET.com at: Fixed Rate Home Loans - Is Now The Best Time To Get One?

Have you got a floating home loan package in Singapore, or are you in the market looking for the right loan package for a refinance or new home purchase? In light of interest rates rising to 7-year highs in Singapore, do read this article to see how you, as a home owner, can fight the curse of rising interest rates in Singapore.

SIBOR (Singapore Interbank Offered Rate) and SOR (Swap Offer Rate) have been extremely popular in the last decade in pricing home loans in Singapore. This is because they had been following a downward trend 10 years back when the Fed stopped rising interest rates.

However, as of 14 January 2016, SIBOR and SOR reached a 7-year high when they hit 1.252 per cent and 1.75581 per cent respectively, according to this Business Times report.

The two main catalysts would be the historic increase of interest rates last month by the Federal Reserve and China's 12 per cent equity market meltdown in the first trading week of 2016.

In fact, SIBOR and SOR had started creeping up since January 2015 in anticipation of the rate hike.

The market had expected the Fed to raise interest rates in June and September but the Fed chose to do it in December due to the June and August market meltdown in China.

For the sake of prudence, they chose to delay it but the inevitable tightening occurred.

Singapore Squeezed Between US And China

Investors became more risk averse when China had its third meltdown in less than 7 months.

It indicates that there might be more trouble ahead and it shows a general incompetence of their authorities to get their act together. But we won't go into the case of this latest meltdown here.

The point is that investors are now leaving Emerging Asia (which includes Singapore) for the safety of the US Dollar (USD).

Besides the allure of the USD as a safe haven, investors are expecting the Fed to raise interest rates 2 to 4 times this year!

This expectation has increased the cost of funds that Singapore banks had to provide investors to persuade them to keep their money in Singapore.

Just in case you are wondering if the Fed would backpedal, it is highly unlikely.

Regional Fed president Dennis Lockhart had recently mentioned that the Fed is watching China closely, but it is not clear if China will affect the US economy at this stage because US consumers are expected to offset it.

In other words, the US economy is strong enough to withstand the Chinese shock but Singapore is squeezed between the US & China.

Why Fixed Home Loans Are Looking Good Now

When we are in a rising interest rate environment, the first thing that we should do is to turn to fixed interest rates home loans for our homes. It can be for new purchases or for the refinancing of existing home loans.

Source: GET.com Home Loan Genius

Using GET.com's new Home Loan Genius (a tool which compares real-time home loan rates from all banks in Singapore), we used an example of a home owner who wishes to purchase a $1 million apartment with a $800,000 loan.

Considering that we are now in a rising interest rate environment, a fixed rate home loan seems to be a better choice over a floating rate.

As you can see from the screenshot above, the best fixed rate in the market is currently being provided by DBS/POSB, at 1.88 per cent locked-in for the next 3 years.

This means that a borrower only has to pay exactly $2909.18 per month over the next 36 months, with the interest rates for the remaining 27 years (assuming he signs up for a maximum loan tenure of 30 years) yet to be determined till the fixed period is over.

Realistically speaking, after 3 years, you can choose to refinance if the prevailing rates are lower at a fixed rate or you can choose a floating/variable rate.

Besides POSB/DBS home loans, local banks such as UOB and OCBC are competitive.

This is not surprising given that they are highly established and have a loyal following of depositors both in savings and fixed deposit accounts.

Bank of China's competitiveness is surprising, though. It is likely that they are pricing themselves aggressively to capture a critical mass of retail customers as their retail branches grow.

The bad news for depositors (savers) is good news for borrowers. As these banks have a lower cost of funding, they will pass on these savings to their borrowers in a competitive market.

Fixed Deposit Home Loans - New Kids In Town

Other than fixed rate packages, there is a relatively new type of home loan in Singapore known either as FHR (Fixed Deposit Home rate) or FD-linked rate (Fixed Deposit linked rate) - essentially, these are interest rates pegged to the bank's fixed deposit rate, rather than the mysterious 'board rate'.

Currently only DBS and OCBC offer home loans that are pegged to their prevailing fixed deposit rates - DBS with its FHR and OCBC with its FD-linked rate. Note that these loan packages are floating, and not 'fixed' as in 'fixed' for the first 2-3 years.

These are new offerings and UOB is probably thinking of how to catch up with them. OCBC offers 36m FD-linked rate based on its prevailing 36-month SGD fixed deposit rate, currently standing at 0.65 per cent.

DBS offers FHR18 based on its prevailing 18-month SGD fixed deposit rate for amounts within $1,000 to $9,999, currently standing at 0.6 per cent.

With fixed rates trending up in tandem with the rise in SIBOR and SOR, we expect to see more home owners eyeing these fixed deposit pegged rates which are comparatively more attractive.

Currently, the best fixed rate in the market is offered by DBS/POSB, at 1.88 per cent locked-in for the next 3 years. Whereas the lowest fixed deposit pegged rates on offer are DBS's FHR18 + 1.05 per cent with a 2-year lock-in period (i.e. 1.65 per cent); and OCBC's 36m FD-linked rate + 1.03 per cent with a 2-year lock-in period (i.e. 1.68 per cent).

You can check out the latest fixed deposit-linked rates for OCBC and DBS here.

Selling Fast

I recently read this Straits Times report from 23 December 2015 mentioning DBS home loan rates. Back then, DBS was offering a 2-year lock-in fixed rate home loan package at 1.65 per cent.

Today no bank in Singapore is offering that rate. Just compare it to the rates you see above. This is because fixed rate home loans are highly popular and the supply of fixed deposit is limited.

Local banks might have to increase fixed deposit interest rates to attract more depositors.

Hence in this rising interest rate environment, you should quickly compare all the home loan rates in the market and check out your eligibility. You can do all this in minutes using GET.com's Home Loan Genius, which compares all the loan rates in Singapore.

Here you can read more about which type of home loan is best in this environment of rising interest rates.

Conclusion

If you got a fixed rate for your home loan back in 2014 when the Fed started warning about normalizing interest rates, then you got the best of both worlds.

Your lock-in period would be ending soon and you can shop around. Currently if you switch to a fixed rate, your risk is that you may be paying more than those with floating rates (SIBOR/SOR) if the Fed were to cut interest rates unexpectedly. Then SIBOR and SOR would drop like a stone.

However, that is highly unlikely and you should act rationally.

Visit GET.com's Home Loan Genius to compare home loans and find the best fixed rate loan for your own needs, whether you want to refinance your current home loan or get an affordable loan for your new purchase.

To find out more, take a look at our guide to home loans in Singapore.

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