What Singaporean Home Owners Must Understand About FHR Loans

Fixed-deposit Home Rate (FHR) loans are increasingly popular. Here's what Singaporean homeowners should know before signing up for one.

With interest rates on the rise, Singaporean homeowners are understandably nervous about the mortgage. Our home loans already make up a substantial part of our monthly expenses, and it’s a good money habit to always compare rates for a better deal. Recently, that’s meant a shift to FHR loans. But what are they, and how much can you trust them?

What is an FHR loan?

Fixed Deposit Home Rate (FHR) loans are offered by DBS and UOB at the moment. Over the past year, there has been a significant shift from traditional SIBOR based loans (we’ll explain this later), to FHR loans.

Based on the advertising, FHR loans offer lower interest rates, and often come with a cap (e.g. a maximum interest rate of 1.8 per cent for the next two years, regardless of how high interest rates rise).

However, what borrowers need to understand is that FHR loans are not fixed, and can still rise. The main difference is that FHR loans are pegged to the bank’s fixed deposit interest rates, instead of the Singapore Interbank Offered Rate (SIBOR).

What Does that Mean, and What Difference Does it Make?

Right up till last year, most home loans in Singapore were pegged to SIBOR. The SIBOR index measures the average interest rate among Singapore’s main banks, to determine your home loan interest.

For example, this is how a home loan rate looks, using SIBOR:

3M SIBOR +0.8%

This would mean the interest rate is the three-month* SIBOR rate, plus the bank’s spread of 0.8 per cent (the spread is just what the bank wants to charge you). So if the three-month SIBOR rate is 0.92 per cent, then your interest rate would be (0.92 + 0.8) = 1.72 per cent per annum.

An FHR loan, however, does away with SIBOR altogether. In place of SIBOR, the bank simply uses whatever rate it gives to its fixed deposits. This is significant in two ways:

First, it means that the bank can technically set whatever interest rate it wants. If the bank decides to double the interest rate next month, it’s entirely within their rights to do so.

The only constraint is that the bank would have to pay out higher interest on its fixed deposits, if it wants to raise the rate. That’s the check and balance, which the bank uses to convince you to take the loan.

For further reassurance, the bank may also promise an absolute limit on how high they can raise the rate (an interest rate cap), which applies for a number of years.

Second, it means the borrower is spared from rising SIBOR rates. Due to situations in the United States (which are beyond the scope of this article), SIBOR has been rising significantly, and is set to continue. The SIBOR rate is, for instance, twice what it was in 2014.

*Three-month SIBOR means your interest rate is changed to match SIBOR every three month, and that’s when your monthly repayment amount will change.

What Sort of Difference Does this Make to Your Wallet?

Let’s compare a typical SIBOR based rate, which today would be around two per cent per annum, to an FHR rate, which is around 1.7 per cent.

Let’s assume you borrowed S$400,000 for your house, and your loan is over a 25 year period.

Assuming the SIBOR based rate remains more or less stable for the entire loan, this would cost around S$1,695 per month in repayments with a total interest repayment of around S$108,625 at the end of the loan.

Assuming the FHR rate remains close to 1.7 per cent throughout, this would mean a monthly repayment of S$1,638 per month, and a total interest repayment of S$91,282 at the end of the loan. That’s a difference of about S$17,343.

But this is a theoretical scenario. The disparity is likely to be much bigger than that, given how SIBOR rates are rising. SIBOR rates have also been at historical lows for almost a decade, and it’s improbable that they can continue that way for even 10 years, let alone 25.

For readers who think the difference is not much (about S$57 per month), we beg to differ. S$57 a month, invested at a modest return of five per cent per annum, is over S$34,000 extra at the end of your home loan - this can be critical in paying off your remaining debts, or boosting your retirement funds, as you near the end of your working life.

And again, we want to stress that the disparity is quite likely to be bigger than that - home loans in Singapore have reached interest rates of four per cent per annum, prior to the financial crisis in 2008.

So This Means We Should All Opt for Cheaper FHR Loans, Correct?

While FHR loans will generally save you money, it’s important to be wary of one big problem.

SIBOR rates cannot be unilaterally controlled by any one bank - it’s based on aggregate results of different banks, and is closely regulated by the Monetary Authority of Singapore (MAS).

An FHR rate, however, is a Board Rate (BR). The bank doesn’t have to explain how it derives the interest rate, nor does it have justify raising said rate. While borrowers hope that higher fixed deposit payouts will deter the bank, there’s every chance they may not - perhaps the bank might decide they can make more money hiking home loan rates, even if their liabilities (the fixed deposits) were to rise.

Furthermore, many FHR loans come with lock-in periods, that prevent you from refinancing (switching to a cheaper loan) for a number of years.

Go in with both eyes open, even if the FHR loans are seemingly the better choice right now. And once you’re out of the lock-in clause, do compare other loan options to make sure you still have the best deal.

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