Banks in S’pore raise fixed-rate mortgage loans; Sora-pegged loans still relatively cheaper
The Straits Times, 6 May 2022, Fri 9:28 pm
By Chor Khieng Yuit
Home owners will have to fork out more for their fixed-rate mortgage payments after some banks here raised their fixed interest rates in anticipation of further rate hikes in the United States.
Citibank was the latest to raise interest rates on its fixed-rate loans on Friday (May 6).
Citi’s two-year fixed rate loan is now at 2.45 per cent – up from 2.35 per cent – while the three-year fixed rate loan has jumped to 2.65 per cent from 2.53 per cent previously.
A check by The Straits Times (ST) found that some of the other banks have also raised fixed rates as recently as this week.
OCBC raised the rates on its one-year fixed rate loan to 1.65 per cent, from 1.55 per cent.
DBS’ two-year fixed rate package is now at 2.25 per cent, from 1.65 per cent last month, while its three-year fixed-flexi package is at 2.5 per cent, from 1.85 per cent previously.
As for UOB, the bank told ST that the rate for its two-year fixed rate package is 2.35 per cent as at May 5.
If the loan amount is more than $300,000, UOB said the interest rate will be lower at 2.25 per cent for the first two years.
Meanwhile, floating interest rates pegged to the Singapore Overnight Rate Average (Sora) have not moved as much yet with the exception of Citi, which on Friday raised the margin for its two-year Sora-pegged loans to 0.78 per cent, from 0.7 per cent.
DBS and UOB have maintained their lending margins at 0.8 per cent, while OCBC has maintained it at 1.2 per cent for year one and 1.3 per cent for year two.
Sora is the interest rate benchmark for pricing mortgage loans in Singapore.
Banks typically charge either a one-month compounded Sora or three-month compounded Sora plus a lending margin for their Sora-pegged floating rate loans.
The one-month compounded Sora is based on Sora rates over the past month, while the three-month compounded Sora is based on Sora rates over the past three months.
But why are fixed rates going up relatively faster than Sora-pegged floating rates?
Mr Eugene Leow, senior rates strategist at DBS Bank, said that fixed rate loans are forward looking over a period of time, such as two to three years.
Hence, the rates have to take into account a more hawkish US central bank in the coming quarters.
Mr Roy Phua, head of mortgage business at Citibank Singapore, said that in a rising rate environment, fixed rate packages are higher as funding costs for the medium term (two to three years) have priced in higher future interest rates.
As for Sora, Mr Paul Wee, vice-president of fintech at property portal PropertyGuru Group, said Sora-pegged loans have not moved as much because Sora is a backwards-looking rate and is based on all the rates of past actual borrowing transactions in the interbank market.
Mr Clive Chng, associate director of mortgage broker Redbrick Mortgage Advisory, said that because banks have liquidity, they do not need to borrow from one another in the interbank market.
If nobody borrows, the Sora rates of borrowing will be lower between banks, Mr Chng said.
With fixed rates going up, but Sora-pegged rates not moving much, the gap between fixed rates and Sora-pegged rates is widening.
Citi’s Mr Phua noted that the difference is currently in the range of between 1.15 per cent and 1.35 per cent, wider than the usual range of between 0.15 per cent and 0.25 per cent.
Mr Kevin Kwek, managing director of Asian financials and fintech at investment manager AllianceBernstein, said such a gap is fair, given current expectations of future rate hikes.
Mr Kwek expects the gap between fixed and floating rates to narrow when there is more certainty over the size and pace of rate hikes.
For now, because Sora-pegged loans are still relatively cheaper, Mr Chng recommends that home owners look at floating rate Sora loans with a one-year lock-in period.
He said that a one-year lock-in floating rate gives home owners the benefit of reaping interest savings from a lower Sora-pegged rate.
At the same time, they have the flexibility to reprice or refinance their loans a year later, instead of being committed to a loan rate for two to three years.
Currently, Mr Chng said only Maybank and Standard Chartered Bank offer one-year lock-in periods for floating rate loans.
ST found that OCBC’s Sora-floating package also allows a free switch to another pricing package after the first year, but this applies to only new loans.
DBS and UOB have also come up with hybrid packages that allow home owners to diversify their mortgage rate risks across a mix of loan packages.
Mr Nelson Neo, head of home financing solutions at DBS Consumer Banking Group, said the bank’s Two-In-One Home Loan package lets borrowers park a portion of their loan amount under a fixed rate package, with the remainder under a floating rate package in ratios of 50:50, 40:60, or 30:70.
Mr Neo said this enables borrowers to better manage their interest expenses.
Ms Jacquelyn Tan, head of group personal financial services at UOB, said customers have been attracted to the bank’s fixed-rate and floating-rate combination loans.
Rising interest rates will impact mortgage payments, so PropertyGuru’s Mr Wee advised borrowers to keep a close eye on rates and look around for the latest loan packages that will give them savings.
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