Will DBS' fixed-rate mortgage move be enough to keep its lead?

Some quarters think so, given that customers are looking for stability in this uncertain economic climate

Wed, Jun 10, 2020

Vivien Shiao

SINGAPORE'S biggest mortgage player DBS is still not going down the well-trodden path of actively offering home loans linked to the Singapore interbank offered rate (Sibor) - though the fall in Sibor could lure customers away from its flagship product, which is tied to the bank's fixed deposit rates.

With that, DBS is counting on its fixed-rate home loans to draw customers or risk losing market share in the competitive mortgage market, where the bank holds the lion's share of home loans.

Analysts said that this move to offer attractive fixed-rate mortgages could still put DBS in a prime spot as the top mortgage bank in Singapore.

But where that needle finally rests comes down to the number of borrowers who are willing to stomach some rate volatility in taking Sibor-linked packages, and how the fierce competition will respond.

Given the lower-for-longer rates environment, borrowers are looking at better rates from a year ago.

Rates for new housing loans as at late May were between 1.4 and 1.8 per cent for the first year - lower than the range of 1.8 to 2.3 per cent the same time last year, going by data from Monetary Authority of Singapore (MAS) cited in a reply to a Parliamentary question in late May.

In line with DBS' pole position in the mortgage market - it has cornered about a third of the market - the same set of MAS data showed that slightly over half of borrowers have housing loans pegged to board rates or linked to fixed deposit rates such as DBS.

With the majority of DBS' floating rate packages tied to the bank's fixed deposit rates, the rates are still higher than what other banks are offering with their Sibor-pegged loans. This is despite the bank revising its fixed deposit rates downwards in May, which led to a corresponding decline in its absolute mortgage floating rates.

Currently, DBS' version of floating-rate packages start at 1.6 per cent per annum all-in, with its latest promotion.

As a comparison, OCBC offers two kinds of floating rate packages - one linked to the three-month Sibor and the other pegged to its board rate.

While OCBC's board rates are similar to DBS' at 1.58 per cent, its Sibor-pegged loans - with a starting rate of three-month Sibor + a 0.8 per cent spread for the first year - appear more attractive. With three-month Sibor now at about 0.55 per cent, this adds up to 1.35 per cent.

With half the borrowers here on mortgages pegged to board rates or linked to fixed-deposit rates, that leaves another quarter each of borrowers on fixed interest rates for the first few years of their loan, and another quarter of borrowers on housing loans pegged to Sibor or the swap offer rate, the MAS data showed.

Clive Chng, associate director of Redbrick Mortgage Advisory told The Business Times that DBS' latest fixed-rate offer is the "most attractive" fixed rate now, especially for the one with a five-year lock-in period.

So while DBS' floating-rate offer that references the fixed-deposit rate still lags the market, its latest fixed rate of 1.5 per cent for its two-year, three-year and five-year packages is among the lowest.

Mr Chng said: "Until recently, the majority of people have been going for floating interest rates. But with the launch of this 1.5 per cent fixed rates, we see more and more people gravitating towards fixed."

Likewise, DBS head of secured lending Tok Geok Peng told BT that more customers are now enquiring about its fixed-rate home loans, owing to the "much-needed stability it brings, especially in the current uncertain interest rate environment".

While Sibor-linked offers are still attractive, spreads on floating rates have "risen quite a fair bit" - from about 0.2 per cent earlier in the year to around 0.8 per cent now, Redbrick's Mr Chng noted.

David Baey, chief executive of Mortgage Master, said that DBS' latest move clearly indicates the bank's goal to remain an industry leader.

He pointed out that floating rates inclusive of bank spreads have an absolute rate of about 1.4 per cent today, with the difference a "small premium to pay to avoid the risks that come with a volatile Sibor-linked package for the next five years".

"A fixed rate offers a sense of security for the more risk-averse, but that security comes at a small premium," he said. "While we don't expect the currently low Sibor to increase over the next year, it's harder to predict the movement beyond that."

Even so, mortgage brokers said that the space remains consistently competitive. They expect banks to roll out more attractive offerings along the way to lure customers. This comes as mortgages are generally considered safe assets for banks.

Mr Chng noted that other banks are already hot on DBS' heels to try to match its fixed rates, at least for the two- and three-year lock-in periods. Just last week, UOB's fixed rates for its two-year lock-in period was revised downward to 1.5 per cent.

Even as Sibor-linked loans are among the lowest in the market currently, DBS' Ms Tok pointed out that there is ongoing discussion around how Sibor will be computed as part of the market benchmark rate reform, with the industry anticipating that its computation will be different.

"Should this change happen, it may create added uncertainty to one's Sibor-pegged home loan rate," she added.

An update on this enhanced Sibor is expected to come out after June, with changes that will take into account bank funding structures and international developments.

Still, given the economic contraction brought on by the effects of the Covid-19 outbreak, home loans are not expected to pick up anytime soon. They have been falling over the month since January last year, on the back of earlier cooling measures.

Mortgage Master's Mr Baey advised customers to choose home loan packages that are transparent, such as fixed rates and Sibor-linked rates, and pick a rate that "best fits their financial situation and risk preferences".

"Home loans are a long-term game, so always make sure you have the financial means to back up your decision."