• Fixed Deposits Linked Home Loan Rates

    Various parameters affect home loan interest rates in Singapore. This is exactly why banks offer both fixed as well as floating interest rates on home loans in Singapore. In a fixed rate package, the interest rate remains fixed throughout the loan tenure, while in a floating rate package, the interest rate can change based on various market parameters – macroeconomic parameters, lending rates of the Central Bank, and more. Banks also prefer offering a combination of fixed and floating rate packages to help customers manage their repayments better.

    Coming to the question of how fixed deposit rates can influence home loan interest rates, well, some banks in Singapore adjust the interest rates on their home loan to the interest rate offered under a fixed deposit account (against a particular tenure). Fixed deposit linked interest rates come under the floating or variable rate package, as they are subject to change by the bank on a periodic basis. Before we go on to look at fixed deposit linked interest rates and how these rates are applicable to home loans, let’s look at how floating rate packages work.

    What Exactly is a floating Rate Package?

    Under a floating rate package, the bank will consider several aspects to determine the interest rate offered on a home loan. Most essential factors, as already mentioned, will include inflation, macroeconomic parameters that also influence lending rates of the Central bank, and rates at which banks lend to each other (also known as SIBOR).

    A floating rate package, for the customer, can be extremely beneficial, as rates can drop as the tenure of the loan progresses. Also, in comparison to a fixed rate package, the interest rate under a floating rate package usually starts off much lower.

    Floating rate packages also gives banks a better opportunity to link their offerings to current market dynamics, reduce interest payments and maximise profits.

    What is a SIBOR-Pegged Rate Package and How is it Different from an FD-: Linked Rate Package?

    SIBOR, short for Singapore Interbank Offered Rate, is the rate at which financial institutions in Singapore lend money to each other. Many banks adjust their interest rates (on property loans) to the SIBOR, letting them better manage interest payments and maximize profits on loan offerings. The interest rate on a home loan under a SIBOR-pegged package will be a certain percentage higher than the existing SIBOR. Note that most loan offerings are linked to either 1-month SIBOR or the 3-month SIBOR. So a variable or floating rate package offered by a bank will be either x+1-month SIBOR or x+3-month SIBOR.

    FD-linked rates also work similarly to SIBOR rates. Only that in this case, the rate is pegged to a FD offering against a particular tenure.

    Example of a Bank Offering Home Loan Interest Rates Based on its FD Rate

    The perfect example of a bank offering an interest rate on its home loan that is linked to its FD rate is DBS. DBS is Singapore’s largest bank that offers a wide range of credit and investment products. Let’s take a look at DBS Bank’s FD-linked interest rate package on its home loan offerings:

    DBS offers a combination of fixed and floating rate packages on its home loan product.

    • For the first three years, customers can enjoy a fixed rate package of 1.65% p.a. for the first two years, followed by an interest rate of FHR8+1.65% thereafter. In this offering, FHR8 indicates the interest rate on DBS Bank’s 8-month Fixed Deposit Account for a deposit amount between S$1,000 and S$9,999.
    • Customers can also choose a fixed rate of 1.85% p.a. for the first three years, followed by a rate of FHR8+1.65% p.a. thereafter.
    • The current 8-month FD rate for deposits between S$1,000 and S$9,999 is 0.20% p.a..
    • Unlike SIBOR, FD-linked rates are less volatile and are less susceptible to constant change. Fixed deposit rates, however, can definitely be subject to change on a periodic basis – this solely depends on the bank.
    • As these rates can change over the course of the loan tenure, FD-linked interest rates also qualify as floating rates.
    • FD-linked rates are understood to be more flexible than other floating rate packages including SIBOR-pegged packages.

    Fixed Deposit Accounts and Reduction in Interest Rates on Home Loans

    In some cases, interest earned on an FD account can be used to offset interest payments towards the home loan. Standard Chartered Bank, a popular bank in Singapore, allows this.

    MortgageOne, one of Standard Chartered Bank’s home loan product, lets customers offset their interest payments on their home loans through interest earnings on SCB fixed deposit account. This helps to greatly shorten loan tenure and save big on interest payments.

    Under such a provision, you can still make withdrawals from your FD account.

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