Banks In Singapore Put Brakes On Fixed-Rate Home Loans Amid Surging Cost Of Funds

April 26, 2022

Some banks in Singapore have suspended fixed-rate home loan packages amid rising interest rates. Credit: Singapore Press  Holdings LTD

Some banks in Singapore have suspended fixed-rate home loan packages amid rising interest rates.

While the lenders said they made these moves as fixed-rate packages have become less attractive for clients, mortgage brokers explained that the rising cost of funds may also have prompted these suspensions, especially among the foreign banks.

Since the end of last year, brokers have been advising those concerned with rising rates and who want peace of mind to consider fixed-rate packages, which offer a flat interest rate, usually for up to 3 years.

This option is now off the table at some banks, including Maybank and Standard Chartered, which have ceased offering fixed-rate home loans earlier this month.

In response to queries from The Business Times, a Standard Chartered spokesperson said: “We observed over the last few months that fixed-rate mortgage loan packages have become less attractive for clients given how interest rates have increased to such a significant extent, so we decided in mid-April to place our current focus on offering floating-rate packages instead."

The spokesperson added that there is “no certainty” StanChart will bring back fixed-rate home loan packages. “It would be highly dependent on prevailing market conditions, which often show a correlation to the type of mortgage packages that our clients choose to take up,” she said.

A spokesperson for Maybank Singapore said the bank regularly reviews its packages and urged customers to consider its packages pegged to the Singapore Overnight Rate Average or SORA. The 1-month compounded SORA is currently hovering at around 0.40 per cent per annum.

While floating rates tend to be lower, they also bear the risk of interest rates moving up. In floating-rate packages, banks add a spread to the floating rate used as a benchmark, to determine the final rate charged to the consumer.

Darren Goh, executive director at MortgageWise.sg, said foreign banks are likely experiencing higher funding costs because they do not have substantial Singapore dollar deposit bases to access lower-cost funding.

The cost of funds refers to how much financial institutions have to pay in order to lend to their customers.

Wayne Quek, a director at Home Loan Whiz, said that it is undesirable for the banks’ treasury teams to hedge interest rate futures amid current volatility and high rates.

“They would then have to price their fixed-rate packages accordingly, and it’d be hard for consumers to stomach these high levels,” Quek said. He cited how HSBC’s 2-year fixed rates (with a minimum loan of S$200,000) had gone up from 1.58 per cent as at the end of March to 2.25 per cent.

HSBC’s head of retail products and journeys Ranojoy Dutta said the bank offers “competitive mortgage rates corresponding to the macroeconomic environment”.

CIMB Singapore’s head of consumer banking and digital Merlyn Tsai said the bank’s earlier fixed-rate packages were “taken up quickly, within weeks”, and that new rates will be launched soon. The earlier rates ranged from 1.2 per cent to 1.35 per cent for 2-year loans, and 1.5 per cent to 1.6 per cent for 3-year loans.

“In fact, across banks, we are seeing the interest rates differential between fixed and floating has widened and more customers are taking up floating-rate packages,” Tsai added.

Clive Chng, an associate director at Redbrick Mortgage Advisory, said increased volatility and rising hedging costs may be prompting banks to resort to abrupt changes in their interest rate offerings.

“Fixed and floating rates can cease any moment with immediate effect, without any warning and this has caused some distress for consumers trying to secure a mortgage.

“We are expecting that these movements will continue for the next 6 to 9 months and would advise consumers to move into a fixed rate if the gap between floating interest rate is reasonable,” he said.

Chng expects the gap between fixed and floating rates to continue to widen.

He also suggested that consumers look at “hybrid mortgages” by splitting their mortgages into 2 so that they can enjoy the lower floating rates as well as the stability that fixed rates offer.

The 3 local banks said they are still offering fixed-rate mortgages, although OCBC’s package is now fixed only for a year at 1.55 per cent per annum. Some mortgage brokers said its 2-year fixed-rate loans are offered only for certain cases, such as in refinancing and repricing.

OCBC's head of home loans Maryanne Phua said its floating-rate packages pegged to the compounded SORA are the more popular option among customers at the moment.

DBS, which updated its home loan rates several days ago, is now offering 2-year fixed rates at 1.95 per cent per annum, up about 0.3 percentage point from March. Its 3-year fixed-flexi package is going at 2.25 per cent per annum.

DBS’s head of home financing solutions Nelson Neo said the bank will continue offering fixed-rate packages.

“Borrowers may be inclined to choose stability for their home loan repayments, and to lock in current fixed rates amid the rising interest rate environment. However, fixed home loan rates are typically higher than floating loan rates and early prepayment fees may apply, hence borrowers need to assess their individual needs, affordability and financial goals before committing to a fixed home loan,” Neo said.

UOB said it has no plans to cease fixed-rate mortgages. Head of group personal financial services Jacquelyn Tan noted that homeowners who prefer fixed rates are opting for “peace of mind and better control over how they manage their finances”.

That said, she encouraged homeowners who want transparency and can manage some variability to consider SORA-pegged packages.

“As the SORA benchmark rate is calculated based on historical transactions, the rate is more reflective of market conditions and will offer homebuyers more transparency on their upcoming monthly loan repayments,” she said.

Credit: Business Times

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