What you need to know about banks raising fixed home loan rates above 4%

SINGAPORE – Home loan rates have shot past the 4 per cent mark after DBS Bank, OCBC Bank and UOB raised their fixed-rate packages on Tuesday (Nov 15).

Of the three local banks, UOB now has the highest rates, with its two-year fixed-rate package at 4.5 per cent a year.

DBS' fixed-rate packages are at 4.25 per cent a year with tenors of two to five years, while OCBC has one- and two-year fixed-rate packages at 4.3 per cent.

A DBS spokesman told The Straits Times that many customers continue to choose fixed-rate packages in anticipation of further rate hikes in US.

The bank is therefore offering longer tenure loans of three to five years, so customers can choose to lock in fixed rates for a longer period to give themselves peace of mind, he added.

OCBC's head of home loans, Ms Maryanne Phua, said that popular demand has prompted the bank to reintroduce fixed-rate packages, which were temporarily taken off the shelf in end-October.

This is to give customers the flexibility to opt for the tenor that best suits their needs, she added.

Fixed home loan rates in Singapore are now above the 4 per cent medium-term interest rate floor that the Monetary Authority of Singapore (MAS) has set to determine the loan amount that an individual can apply for.

The medium-term interest rate floor framework ensures that people continue to borrow or take loans prudently as interest rates rise.

Even though the latest home loan rates have exceeded the 4 per cent floor rate, borrowers need not be overly concerned that they are paying more than what they can afford.

This is because OCBC is already using a higher rate of 4.5 per cent to calculate the maximum loan amount that a home owner can borrow, while DBS is using 4.25 per cent.

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As a result, home owners will only be allowed to borrow a smaller loan amount, thus ensuring that their monthly instalments can still meet the total debt servicing ratio threshold, which stipulates that a borrower's total debt obligations are to comprise at most 55 per cent of his monthly income.

For instance, for a home owner with a fixed monthly income of $10,000 and a loan tenure of 25 years, the maximum amount he can borrow at the MAS medium-term loan rate of 4 per cent is around $1.05 million.

By using a higher rate of 4.25 per cent in DBS' case, the same home owner can now borrow less – around $1.02 million.

In OCBC's case, with a 4.5 per cent medium-term rate to calculate the loan amount, the home owner can borrow only about $1 million.

Financial services manager Carrie Chee, 39, is one home owner who is not too worried about rising rates.

Ms Chee refinanced the loan for her two-bedroom condominium unit in April 2021 at a fixed rate of 1.18 per cent a year for the first two years. She would need to worry about it only in April 2023 when the two-year lock-in period is up, and she can refinance or reprice her loan.

Meanwhile, Ms Chee is looking for a new property and if she finds one that she likes, she will buy the unit, regardless of how high interest rates are at the time.

Home loan packages

For home owners who are deciding whether to reprice or refinance their loans, mortgage brokers said it may be more feasible to take a shorter-duration fixed-rate loan.

Mr David Baey, chief executive of Mortgage Master, said a one-year fixed-rate loan may give home owners more flexibility – they are locked in for the first year and can hedge against rising rates in 2023. Then in 2024, they can move to a floating rate that is pegged to the Singapore Overnight Rate Average (Sora) and will be able to benefit if interest rates fall then.

Floating-rate packages based on Sora remain unchanged, with DBS offering a package of three-month compounded Sora plus a 1 per cent spread. 

OCBC's package is based on three-month compounded Sora plus 0.98 per cent, and UOB has a promotional Sora package based on a three-month compounded Sora plus 0.7 per cent.

With three-month compounded Sora at Tuesday's rate of 2.6633 per cent, UOB's floating-rate package is the most attractive at 3.3633 per cent a year, while DBS' package is at 3.6633 per cent a year. OCBC's Sora package is at 3.6433 per cent a year.

Mr Clive Chng, associate director of Redbrick Mortgage Advisory, said undecided home owners can choose hybrid loan packages with 50 per cent of the loan under a fixed rate and the other 50 per cent under the floating rate. This way, they are partially protected if interest rates rise, and could still benefit if the rates drop.

Ms Jacquelyn Tan, UOB's head of group personal financial services, noted that home owners have the flexibility of repaying the floating-rate portion of their home loan with the bank without incurring any penalties.

DBS also has a two-in-one home loan package and a bank spokesman said there is growing interest among customers, as the blended rate of these packages is typically lower than fixed-rate loans.

Home owners who have cash on hand can consider an interest offset account, said Mr Chng. The deposits in these accounts earn interest, which can be used to offset the interest rates from their mortgage loan.

Only the offshore banks, Standard Chartered, HSBC and Citi, currently offer interest offset accounts.

Other options include using excess cash to reduce the loan amount, so the home owner saves on monthly interest payments. But this means the person will not be able to draw on liquid cash in an emergency, Mr Chng added.

Mr Chng said home owners can also stretch their loan tenures so they pay lower instalments each month.

"In the longer term, you pay a little bit more interest because you take a longer time to repay your loan, but this helps you to manage your current cash flow," he said.

ALSO READ: Partial repayment: Why should you consider it instead of fully paying off your home loan

This article was first published in The Straits Times. Permission required for reproduction.