When I think “groundbreaking”, I think of Marvel and the first Guardians of the Galaxy movie, which starred a talking raccoon and a walking tree and still managed to pocket US$773.3 million at the worldwide box office to become 2014’s #1 superhero film. When I think groundbreaking, I don’t think of the FHR, a DBS home loan that is leading the wave of FD linked offerings from banks.
But DBS has definitely broken some new ground by introducing their Fixed Deposit Home Rate, or FHR. Since 2014, this DBS home loan rate has become the preferred alternative to the Singapore Interbank Offered Rate, or SIBOR, spawning similar products like FDPR (the UOB home loan rate) and FDR (the Standard Chartered home loan).
What is FHR based on?
DBS is now offering the FHR8 package, which is essentially the 8-month S$ Fixed Deposit (FD) rate, which currently stands at 0.20%. This is the third time that DBS has changed the benchmark for their home loan rates. The previous packages were the FHR9, which used the 9-month S$ Fixed Deposit rate of 0.25%, and the FHR18, which used the 18-month S$ Fixed Deposit rate, which stood at 0.6%.
When it was first introduced, the formula used for calculating the FHR was an average of the bank’s 12-month and 24-month S$ Fixed Deposit (FD) rates. Previously, these rates were at 0.25% and 0.55%, respectively, making the original FHR 0.4%.
Customers who had previously signed up for a package on the old rates will still have their interest rate based on the old calculation method.
So why is FHR a board rate?
Unlike the SIBOR, the FHR (whether it’s FHR8, FHR9 or FHR18) is still considered a board rate because it is internally determined, but it is a bit of a hybrid in this sense. DBS still reserves the sole right to adjust the rate as and when it pleases, by adjusting their Singapore dollar fixed deposit rates. Unlike other banks’ board rates, which have no transparency when it comes to how it is determined, DBS has pegged the FHR solely to their own internally determined FD interest rates.
However, it’s important to note that ultimately, FD rates are controlled by the Monetary Authority of Singapore (MAS). This is a monetary policy that provides a floor and ceiling to the banks to keep the FD rates in control. So in this regard, the rates are semi-transparent in that the banks still publish their rates, but there is a margin by which they can adjust the rates.
What are the advantages of a DBS home loan like the FHR?
The FHR8 is relatively easy to calculate. It’s simply the 8-month DBS bank FD interest rate, and it is openly published on the bank’s website. In contrast, the SIBOR is determined by at least 8 banks and changes on a daily basis.
It is also good business sense that DBS will want to keep its FD interest rates low, since they represent a cost to the bank.
Over the past decade the FD interest rates have been consistently decreasing. Even with the inevitable US economic growth, they are not expected to increase by much. This perceived stability of the FHR will continue to be its advantage over the relatively volatile SIBOR, which has predicted to increase dramatically in the near future. For example, here’s a historical chart of the FHR9 versus the 3-month SIBOR just to give you an idea of the fluctuations.
Are there any disadvantages of FHR?
Think about Section 377A of our Penal Code. Just because it’s not “actively enforced”, doesn’t make sex between consenting male adults any less of a crime in Singapore, in the eyes of the law. Variable rates are the Section 377A of home loans. Just because the bank says that the board rates have not changed in the past 9 years, they continue to have every right to adjust them, anytime they want to.
The FHR is a board rate. It is much more transparent than other banks’ board rates, but it is still a board rate. Even if it means incurring a cost by raising their fixed deposit interest rates, there is nothing to stop DBS from increasing it as and when they need to.
As Warren Buffett famously said, “Risk comes from not knowing what you’re doing”.
DBS is saving you the stress of figuring out the SIBOR (and all its permutations) and how it can affect your DBS home loan. They want you to choose the simpler, more straightforward option they propose, a rate that is easily calculated.
But unless you’re a child playing Monopoly, you shouldn’t be making a decision about your money solely based on how easy the options are to understand.
Is FHR better than other banks’ board rates?
This is something that’s very subjective. There is a transparency in how the FHR is calculated, one that is pegged to information about the bank’s FD interest rates that is readily available online. As we mentioned above, the popularity of the DBS home loan led to other banks like UOB creating their own version of the fixed deposit-linked home loan rate.
As of May 2018, the FHR8 DBS home loan package is one of the lowest in Singapore. It is FHR8 + 1.45% = 1.65% for the first year.
Is the new FHR8 better than SIBOR?
Right now, the 1-mth SIBOR (one of the most popular home loan package rate) is at about 1.375%, which is much higher than the current FHR8 of 0.20%. The SIBOR has been rising steadily in the past year.
How long the FHR8 will remain at 0.20% is impossible to predict. What we can say is that, responding to the US’s economic recovery, it’s almost certain that the SIBOR will continue to rise in the near future. Based on FD interest rate trends, the FHR8 will not increase as quickly as the SIBOR. Even when FHR9 recently increased, it increased from 0.25% to 0.50%, a 0.25% increase. Over the same period of time, SIBOR rose from 1.00% to 1.375%, an increase of 0.375%!
The DBS FHR8 historical rate (over the past decade) has remained low. The highest rate in the FHR8 history was 1.00% which happened in 2002.
Of course, with FHR8 vs SIBOR, you should also consider the bank’s charges (also known as the “fixed spread”). The lower the spread the better!
Still can’t decide between FHR and SIBOR? We’ll help you find the best DBS home loan interest rates and take some of the guesswork out of your home loan application.
Choo Yut Shing