UOB is the latest bank to offer Mortgage Loan pegged to Fixed Deposit Rate
Since 2007, the mortgage market is dominated by mainly Sibor/SOR, Fixed Rate and board rate package. In 2014, DBS is the first bank to offer mortgage loan package pegged to their fixed deposit rate (FHR). In late 2015, OCBC launched their own version called FDMR36.
So how does this type of rate works?
When DBS first launched FHR, they pegged it to the average of their 12 month and 24 month fixed deposit rate and in 2015, DBS introduced a new FHR18 which is pegged to their 18 months fixed deposit rate. The number after the index name (i.e FHR,FDMR) implies the term which the fixed deposit rate is used (FDMR36 is pegged to OCBC 36 months fixed deposit rate).
And now 2016, UOB is the latest bank to join in with their 36M FDPR (Fixed Deposit Property Rate). Here is UOB package details
Year 1: 1.15% + 36M FDPR = 1.8%
Year 2: 1.15% + 36M FDPR = 1.8%
Year 3: 1.15% + 36M FDPR = 1.8%
Thereafter: 1.65% + 36M FDPR = 2.3%
2 years lock-in
36M FDPR is currently 0.65%. (pegged to 36 months Fixed Deposit)
Banks usually review their fixed deposit rate every few months or so, if they do change the rate, your mortgage loan interest will affected by the change. Its 100% transparent to the borrower, all they need to do, is to go to the bank’s fixed deposit rate page and they can check it.
So why should i pegged my mortgage to the fixed deposit?
Unlike Sibor or SOR index, fixed deposit rate movement is much more resilient to money market news and movement. Any change or news release in US Fed rates would almost mean an immediate change for SOR which is pegged to the USD and Sibor will be affected as well.
Fixed deposit on the other hand is totally different from Sibor or SOR. Banks use fixed deposit to raise funding for the bank’s businesses. When the bank needs more funding, they will offer a better fixed deposit rate to attract more deposit to the bank and locked it for the next 1 to 3 years (to lend to others at a higher interest to generate revenue for the bank). When the bank does not need much funding, they offer you a nominal rate for your deposits. That is also why foreign banks tend to offer better fixed deposit rates compared to local banks because their deposit base is definitely not as huge as local banks.
Banks would definitely try to raise funding through cheaper means such as fixed deposit before resorting to borrow from others banks using Sibor.
With Sibor crossing over 1% currently, Fixed Deposit Rate Index is a good way to hedge against future Sibor increase.
Here is an overview of the various Fixed Deposit Rate Index
DBS FHR18 : 0.6%
OCBC FDMR36: 0.65%
UOB 36M FDPR: 0.65%
Pls drop an email to email@example.com if you have any questions or loan enquiry