Fixed Deposit Home Rate (FHR) loans are loans with interest rates tied to fixed deposit interest rates. Recently, such loans have become quite popular among property owners looking to finance their properties. They like such loans because the interest rates are much more stable than those of the Singapore Interbank Offered Rate (SIBOR) loans. In addition, it is perceived that if banks were to raise the FHR rates, they would also incur higher interest costs for their source of funds, thus making such moves unlikely. However, is that really the case?
Currently, the FHR loans available in the market are DBS' 18-month FHR and OCBC's 36-month FHR loans. The figure below shows the breakdown of bank deposits by maturity, using OCBC's latest financial statements, which have a more detailed breakdown of bank deposits than DBS'.
|Fig. 1: Bank Deposits by Maturity|
As shown above, a great majority of bank deposits have maturity of less than 1 year. Deposits with maturity of 1-3 years, which form the basis of FHR loans, constitutes only 1% of all bank deposits. Thus, by tying FHR rates to that of fixed deposits with maturity greater than 1 year, banks will actually not feel the pinch should they raise the FHR rates.
The reason for the short maturity of bank deposits is shown in Fig. 2 below.
|Fig. 2: Bank Deposits by Type|
Among the bank deposits, current accounts constitute 31% of all deposits while savings deposits constitute another 18%. Together, such short-term on-demand deposits make up 49% of all bank deposits. Fixed deposits constitute 43% while other types of deposits make up the remaining 8%. Thus, although fixed deposits represent the largest source of funds for the banks, they do not form the bulk of the funds.
In conclusion, banks still come up tops by offering home loans with rates that are tied to fixed deposit rates.
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