The latest home loan innovation to hit Singapore is a benchmark based on fixed deposit rates plus a premium. All the better to vary your mortgage interest with, the salespeople say. But what consumers really need is not another twist to the floating-rate mortgage, but rather better fixed-coupon loans that are easy to account for in budgets and that protect against rising interest rates.
DBS Bank has been making the headlines with its introduction of the “fixed-deposit home rate“. The new benchmark is being marketed as an easy-to-understand alternative to the Singapore Interbank Offer Rates (Sibor). Whether that is actually the case is debatable.
The Sibor-setting process admittedly has serious flaws – banks around the world have been found to try to manipulate interbank rates, for example – but most of the time it serves its purpose adequately. Because the benchmark is so widely used, there is usually an incentive to be accurate – a rate that benefits one position could just as easily hurt another in the bank’s books.
For all of Sibor’s faults, though, it is not clear that basing loan rates on the bank’s fixed-deposit interest is necessarily better for consumers. If Sibor is hard to understand, the mechanism for setting fixed-deposit rates is even more opaque.
Consumers might be better served if the banks and regulators pour their resources into developing a greater variety of fixed-rate mortgages.
Banks have long complained that lack of demand is the real culprit behind the market’s lacklustre fixed-rate mortgage offerings. Demand is unlikely to be any better than it is now with prevailing interest rates near all-time lows. While rates are not expected to climb quickly over the next year, the outlook has nevertheless become brighter.
For a homebuyer, the higher risk is of rates and inflation rising faster than expected, making the stability of a fixed-rate loan more attractive at this time. Offering longer tenures could help improve take-up among borrowers. A quick check showed that the longest period for which a Singapore retail homebuyer can lock in a rate at the moment is five years. For serious buyers, who are in it for the long haul, five years does not offer much comfort. Friendlier early-payment terms would also help.
Regulators can also help by looking to develop mortgage securitisation that could allow banks to share or transfer some of their risks. Helping to develop the fixed-rate mortgage market makes sense from a risk perspective; defaults are less of a problem when borrowers can budget for interest payments well into the future. Fixed-rate mortgages do not always offer the best deal, but homebuyers should have more viable options if they choose to go down that path.