It’s 2016 and almost everyone in Singapore has a smartphone. So it’s hard to imagine that there was a time, not so long ago, when a mobile phone without a keypad was considered an impractical concept. Apple changed all that with the iPhone, and since then, an idea that no one thought would work has become the new standard for all mobile phones. Apple has continually led the way in terms of innovation, with everyone else just playing catch-up.
In the home loans market in Singapore, different banks have taken turns to come up with the best home loan package, each trying to outdo their competition by offering lower rates or more attractive benefits. But this year, one bank in particular seems to want to be the Apple of home loan packages. This bank has the best home loan package, and it’s unbeatable. What does this mean for the home loan market?
Eh, wait, wait, before you go into your analysis, let me know what the best home loan rate is first.
Okay, so on 1 June 2016, DBS launched a new 3-year fixed rate home loan package at 1.80% with a lock-in period of 3 years. After that, it will switch to an FHR18 + 1.20% package throughout.
Not only does this make anyone who signed up for their May Day package last month look like absolute chumps, but it also makes anyone who signs up with their other existing package, a floating rate that is FHR18 + 1.20% throughout look like the God of Gamblers in comparison for taking a risk that the FHR18 will increase.
So why is DBS pulling out all the stops when it comes to getting market share for home loans? And what does this mean for the home loan market in 2016? We take an educated guess here:
1. DBS has too much funds that are not making money for them.
Banks traditionally make money by providing loans and charging interest. If they don’t, then they are effectively losing money because of the interest they pay on regular savings accounts and fixed deposit accounts. This is one plausible reason why DBS currently seems so desperate to loan money out, even at a relatively low interest rate. Because even if your money is earning you a relatively miniscule amount (like 1.80%), it’s still better than your funds just sitting around not earning anything.
And as Singapore’s largest local bank, there’s no doubt that they are already sitting on a lot of funds. That means, unlike other banks, DBS has the greatest ability to keep launching low rate home loan packages. Announcing this fixed rate home loan package so soon after the May Day promotion shows that they’re serious about being the best in the market.
2. DBS expects the SIBOR to rise significantly over the next three years. In fact, they’re banking on it.
Typically, fixed rate home loan packages are pegged higher than floating packages. This is because you, as the customer, are expected to pay a premium for the security that having a fixed interest rate gives you. In this case, the new DBS fixed rate home loan package is at 1.80%, which is the same rate as their existing floating package pegged to fixed-deposit rates, and is only slightly higher than the best SIBOR-linked package from other banks right now.
This could only mean one thing – that DBS is not only expecting the SIBOR to rise, it’s hoping you also expect it too. After all, why risk a SIBOR-linked package that could eventually cost you 2.00% a year in the near future, when you have a fixed rate package that won’t change for 3 years?
It’s also important to note that while DBS still has one SIBOR-linked home loan package, it’s not a very competitive one. In fact, it’s one of the worst SIBOR-linked packages in the market right now.
3. With banks competing to be the lowest, there’s really no better time to refinance.
For most of us Singaporeans, our home loan is the biggest financial commitment of our lives. That’s why it’s still quite surprising that people don’t know about refinancing. Refinancing means that you can take your existing home loan and transfer it to another bank offering a lower home loan interest rate. This way you can often save hundreds of dollars by paying less each month.
With DBS offering the lowest fixed rate home loan package in Singapore, and with the SIBOR eventually going to rise, it makes absolute sense to refinance to DBS’ fixed rate home loan package as soon as possible, especially if you’re on a SIBOR-linked home loan package.
4. Why doesn’t DBS seem to bother with SIBOR-linked home loan packages?
The whole draw of SIBOR-linked home loan packages was that the SIBOR was transparent. It is the essentially the lending rate of funds between banks, so no one bank can take unilateral control of it. As a result, banks with SIBOR-linked home loan packages needed to rely on what is known as the spread to make money. The spread is that additional percentage you find on home loan packages, for example, 1-mth SIBOR + 0.65%. 0.65% is the spread.
However, by not focusing on SIBOR-linked home loan packages, DBS is essentially taking back full control of how much they can earn from home loans. This is something to watch out for, as it means they essentially have free reign to adjust numbers as they see fit – numbers like the 18-month fixed deposit interest rate, which the FHR18 is pegged to, for example.
5. What does this mean for other banks’ home loan packages?
DBS is essentially starting a price war here, one that they seem convinced they can win. As a result, other banks may fall over themselves trying to put out cheaper home loan packages.
They say that in a price war, the consumers benefit, but in the case of home loans, where a package is often a 30 to 40 year commitment, it really is a matter of caveat emptor – buyer beware. In your rush to get the cheapest home loan package, you might not realise that it’s not the best. For example, one bank may offer the cheapest rate in the first year but may then force you to deal with a significantly higher interest rate in the third or fourth year.
Ultimately, you should compare all the available home loan packages and decide which works best for your new home purchase or refinancing. Better still, contact our mortgage specialist – it’s free and he’ll help explain to you why the cheapest home loan rate might not be the best.