Sunday 20 March 2016

Behind Fixed Deposit Home Loan Rates

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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  1. Will need more data such as FHR total loan out and total FD. Then we can determine whose top. Even with that, is still a cost to the bank so the motivation is much lesser. The key driver is market share in the home market and leveraging its outsize saving pool.

    1. If you refer to A Comparison of the 3 Local Banks, the proportion of housing loans is between 20% and 25% of all bank loans (noted that not all of them will be FHR loans). In comparison, fixed deposits that form the basis of FHR loans constitute only 1% of bank deposits. Thus, I believe that FHR loans still benefit the banks.

      Ultimately, regardless of fixed rate, SIBOR or FHR loans, what will keep loan interest rates low is still competition.

  2. IMO, when banks raise the > 1 yr FD rates, their < 1 yr FD rates will also go up so it ain't so straight forward.

    But nonetheless, between a Sibor vs FHR, most will find FHR to be the better deal.

    1. It's difficult to tell. FD rates are a type of board rates and banks have full discretion to set them. Ultimately, it depends on competition from other banks to keep loan interest rates low.

    2. Well historically FD rates still less volatile and lower than Sibor. So while its a board rate, historical trends are on our side.

      So it really depends on the individual. If we are fixated that FD rates are a type of board rate then we will not go for it.

      I've switched over when DBS first offered. It made sense to me and I have benefitted thus far. Its still way lower than the usual 3mth sibor + spread.

    3. Agree with you that FD rates are more stable than SIBOR rates, and that is important for people to plan their finances in advance.

      Generally, board rate has the inherent disadvantage of being set by the bank. But if there is competition and people are not locked in by the loan, board rate is not much of an issue. After all, a lot of prices are set by companies and it is through competition that we get lower prices.

    4. In this case, it depends on what are the bank's competing for. If it's for deposits, then the deposit rates will rise.

      However the actual FD rates correlates much closer to the global rates.

      All the other higher yielding FD interest rates are just promotional rates for a period of time before they revert back to the banks' board rates.

  3. FHR has a history of more stability as compared to SIBOR. It will still increase but i reckon won't be as much as SIBOR. the highest 3 month sibor was 7%+ in 1997 while FHR didn't spike as high as that.

    1. Agree with you that FHR is more stable than SIBOR.