Singaporeans love fads. If you’re around my age, you’ll remember how the bubble tea craze first started with hopeful entrepreneurs opening stalls all over the island, and the huge competition meant that prices began dropping like crazy. Eventually, they all closed down because the business was unsustainable. Then, a couple of years later, name brands like Koi and Gong Cha came into Singapore and were now selling bubble tea at premium prices, starting a new craze. It’s the same with the home loans market in Singapore.
DBS successfully launched the Fixed Deposit Home Rate or DBS FHR last year, which provided an alternative to the SIBOR for home loans. In order to stay competitive, ANZ now joins the fray with yet another alternative, the Combo Plus Package. This is an alternative home loan package that is not directly connected to the SIBOR. We’ll find out how it compares.
Okay… so how is the Combo Plus Rate calculated?
The Combo Plus Rate is the average of the 3-month ANZ cost of funds for SGD rate and the 12-month ANZ cost of funds for SGD rate. It is calculated on the first business day of the month.
Wait, how is the ANZ “cost of funds for SGD rate” determined? Is it transparent?
Very simply put, the cost of funds for SGD rate refers to the cost ANZ would incur to “borrow” money. This rate is based on the interest rate of their saving accounts that you deposit money into, as well as the interest rate in which banks in Singapore borrow money from each other. To get an idea how much it currently costs banks in Singapore to borrow money, we just need to look at the SIBOR or the Singapore InterBank Offered Rate.
However, unlike the SIBOR, which is publicly known, or the DBS FHR, the ANZ cost of funds for SGD rate is not publicly available. ANZ claims that they will publish the 5 year history for the cost of funds online but while writing this article, I was unable to find any trace of it. That’s not very transparent.
All we know is that the “cost of funds” also includes any additional costs incurred by the bank, such as administrative costs. Of course, this practice is normal and to be expected of any bank.
So, is it fair to say that the ANZ Combo Plus Package is like the DBS FHR-based home loan?
The DBS FHR is technically a board rate, since it is determined by the bank internally. However, unlike normal board rates, which are arbitrary, the FHR is reliant on the fixed deposit interest rates set by DBS. That means, should DBS want to increase their home loan rates, they would also need to increase their fixed deposit interest rates. This, of course, would not be prudent, since that represents a specific cost to the bank.
The ANZ Combo Plus Package works on a similar principle, but with a distinct difference. The Combo Plus Rate is very much a board rate, since it is determined by ANZ internally, with no real transparency as to how it is calculated. Now, you may say, that’s not a fair statement to make. By pegging it to the bank’s “cost of funds”, ANZ is assuring customers that they won’t artificially inflate the rates and that it is normally in their best interests not to raise the “cost of funds”, since that would mean that the bank’s own costs increase.
But that’s what makes all the difference!
With the DBS FHR-based packages, any increase in the home loan rate presumably also benefits customers, who will enjoy higher fixed deposit interest rates. For the ANZ Combo Plus Package, there is no immediate benefit to customers, since an increase in the Combo Plus Rate may not be due to an increase in the interest rates for any of ANZ’s savings accounts.
In an extreme scenario, this means that if you’re under the ANZ Combo Plus Package, you will be paying the price if ANZ does not keep its costs of borrowing money low. Crudely put, ANZ will be passing on any increase in cost they encounter directly to you, and there’s nothing you can do about it.
Wah, that bad? Why should anyone go for it then?
Because right now, it’s still competitive. The 3-month SIBOR (the benchmark for most home loans in Singapore) is currently at 1.13%. The current Combo Plus Rate is 1.29%. However, what makes ANZ’s Combo Plus Package competitive is the “fixed spread”, or the additional charges by the bank. The lower the spread the better!
ANZ’s Combo Plus Package offers an extremely low spread of 0.55% for the first year, 0.70% for the second year and 0.85% thereafter. Using the current Combo Plus Rate of 1.29%, these are the rates you can expect for your home loan:
|General Banking Customer||Interest Rate|
|Year 1||COMBO Plus Rate1 + 0.55%||1.84%|
|Year 2||COMBO Plus Rate1 + 0.70%||1.99%|
|Thereafter||COMBO Plus Rate1 + 0.85%||2.14%|
However, at the end of the day, even a low spread won’t be able to save you if the Combo Plus Rate shoots for the moon, in response to an increasing SIBOR. However, based on current interest levels, it is still very much a competitive package and a good consideration.
Can’t decide between the Combo Plus Rate, FHR and SIBOR? We’ll help you with your home loan application by finding the best home loan interest rates for you.