I’m a big professional wrestling fan, but one thing I’m glad for, is that over-the-top gimmicks are thankfully a thing of the past. Well, mostly. They introduced a wrestling ballroom dancer three years ago.
The less said about that, the better. But pro wrestling isn’t the only industry with gimmicks. Earlier this week, DBS revealed their May Day Home Loan Special, a promotional home loan package that claims to be irresistibly low at a rate of 1% per annum.
Wait, what May Day Special? This is the first I’m hearing of it.
It’s actually pretty simple, at first glance:
|DBS May Day Special|
|First Year||1.00% per year for amounts up to $1 million|
|Second Year and beyond||FHR18 + 1.20% per year|
The lock-in period for this May Day Special is for 3 years.
The FHR18 refers to the Fixed Deposit Home Rate that DBS pioneered. It is pegged to the bank’s 18-month fixed deposit interest rate, and is currently 0.600% per year.
What does this mean for you? As an example, let’s assume you have a $1 million loan over 30 years. We’ll also assume that the FHR18 rate doesn’t change at all (an assumption we’ll talk more about later). You’re looking at a monthly repayment of $3,216.40 for the first year, followed by a monthly repayment amount of $3,584.60 from the second year onwards.
So does the DBS May Day Special meet the four key factors of a good home loan rate? Let’s find out.
1. How long does this promotional rate last?
Here I’m not talking about when they’ll take it off the market (20 May 2016), but how long the promotional interest rate lasts. In the case of the DBS May Day Home Loan? It’s a fixed rate of 1% per annum, but just for the first year. After the first year, your interest rate then changes to FHR18 + 1.20% per year. Also, remember that the 1% only applies to the first $1 million of your home loan.
A low interest rate in the first year will seem tempting at first. We get it. 1% per annum is as low as it gets in this day and age. However, the key to a good home loan rate is not just which package offers you the lowest rate, but which package offers you the lowest rate the longest.
Why is this important? Because don’t want to get lured in by a low rate, only to find that the rates go up significantly later on, and by that time you have no chance to escape. Which brings us to the second point.
2. How long is the lock-in period for?
The DBS May Day Home Loan has a 3-year lock-in period. This means that you will be severely penalised if you try to switch to a lower interest rate loan during the lock-in period. While lock-in periods are often fine if you’re on a home loan package where the interest rates are fixed, having a lock-in period when the interest rates are floating usually come with more disadvantages than advantages.
Why? Because you don’t want to be chained to a single bank’s rising interest rate package, especially at a time when banks are competing with one another to lower their home loan package rates. So make sure that, if you’re going to be locked-in, you pick a floating package that is relatively stable. Which brings us to the third point.
3. Exactly how stable is the FHR18 rate?
When the concept of a mortgage interest rate that is linked to fixed deposit interest rates was first proposed by DBS, we were very enthusiastic about how the bank was essentially pioneering an alternative to the potentially volatile SIBOR. Its subsequent popularity with customers and the fact that OCBC and now UOB have since introduced their own mortgage rate pegged to fixed-deposit interest rates was further proof that DBS was on the right track. We’ll soon be doing a comparison of the three fixed-deposit linked mortgage packages soon, so follow us on Facebook.
However, the fact remains that DBS has full control over the FHR18. Once the cost of increasing the FHR18 (i.e. the extra interest they would need to pay to those who have parked their funds in a fixed deposit) matches or is less than the revenue they get by increasing the FHR18 (i.e. the extra interest they would earn from home loan customers), there really is nothing to stop them from raising their rates.
Will DBS increase the FHR18 rate? Probably not anytime soon, to be honest. But that doesn’t change the fact that DBS can unilaterally do it as soon as it suits them, should the interest rate environment change suddenly. Which brings us to our last, and perhaps most important question.
4. What kind of interest rate environment are we currently in, and what’s the best package right now?
When deciding the best home loan rate, this is a key question. Why? Because the best rate depends heavily on the interest rate environment. From 2009 till early 2015, when the SIBOR was way below 1%, it made complete sense to go with a floating rate. In the current interest rate environment, however, things are less clear.
The SIBOR, for example, had started to rise over the past year, in anticipation of the US Federal Rate hike that was supposed to happen in 2015. But when the hike turned out to be little more than a crawl, it resulted in the SIBOR weakening over the past two months.
Usually when interest rate increases are expected, we would advise a fixed rates home loan package. However, in the current interest rate environment we’re in, it would seem that SIBOR-based packages, despite their potential volatility, may be best for now. Banks are now offering really attractive SIBOR-based packages with lock-in periods of 2 years or less, with some even offering no lock-in.
So after looking at these 4 factors, should you still go with the DBS May Day Home Loan Special?
We can’t deny that the 1% rate for the first year is very attractive, and that, should the FHR18 remain stable, will make this DBS May Day Home Loan Special truly competitive. However, the 3-year lock-in period is a cause for concern, especially in the current market.
If you are buying a completed residential property in Singapore, and are looking for a loan, make sure you speak to our mortgage specialists first. They’ll help you find the best loans in the market for your needs.