Obtaining a property loan can get pretty confusing, and one of the worst aspects is getting bombarded with jargons. So let us explore today one of the most common yet occasionally confusing loans in the market: the Fixed Deposit Home Rate (FHR) 18. So what is FHR, and how does it affect you and your property?
Fixed Deposit Home Rate (FHR) Loan Defined
The first step is to understanding what is Fixed Deposit Home Rate (FHR).
You may notice that the Fixed Deposit Home Rate (FHR) comes with a number, such as FHR 18. This number serves as a gauge of the loan’s average fixed deposit rate over a specific period of time. So, a FHR 18 is pegged to the 18-month, average fixed deposit rate of the bank, an FHR 8 to the eight-month rate, and an FHR 6 to the six-month rate, and so on.
Getting a FHR loan for your property means that the interest rate of your loan is pegged to the fixed deposit rate of your bank. Hence, if your bank charges a fixed deposit rate of 0.6 percent and its spread is one percent, your home loan interest rate would be 1.6 percent per annum.
Why is FHR one of the most popular property loans in Singapore?
In Singapore, home loan rates are pegged to some sort of an index, such as SIBOR (Singapore Interbank Offered Rate), SOR (Swap Offer Rate) and so forth. To know your total interest rate, you simply add the spread offered by your bank to the index.
If the index used, for example, is 0.9 percent and your bank’s spread is 1.2 percent, your total interest rate would be 2.1 percent.
The reason for its popularity is that banks have zero spread charges for FHR. DBS and UOB, for instance, both offer a fixed deposit rate of about 0.6 percent — which implies that your interest rates would be pleasantly low at just 0.6 percent per annum.
To illustrate further:
If you take a loan of $800,000 with a 25-year tenure and the usual interest rate of 1.8 percent per annum – your monthly repayment would be about $3,313.
But if you used a DBS or UOB zero spread package, the interest rate of your loan would be 0.6 percent while your monthly repayments would just be about $2,872. This means you will save about $441 each month.
You would have to bear in mind, however, that this deal is only available for properties under development. The spread increases to one percent once the property is completed (receives Temporary Occupancy Permit). Thus, your monthly repayments would go up to $3,237 after three years, which is the usual time most properties receive their TOP. This would still translate to a monthly savings of $76 compared to a typical loan package.
Are there any hidden risks?
Some people argue that Fixed Deposit Home Rate comes with a hidden risk as it is still a board rate – thus their preference for loan packages pegged to SIBOR or SOR.
SIBOR or SOR cannot be raised by a single bank as they are regulated by the Monetary Authority of Singapore, while board rates can be raised any time by a bank since they are internally determined.
But while they have full control over it, banks are unlikely to lower or raise it any time. This comes as raising their fixed deposit rates would also mean an increase in the amount they pay out to their depositors.
Aside from the increase in their own liability as an inherent control measure, banks are also required to advertise their fixed deposit rates – providing borrowers transparency and the opportunity to refinance their loans in the event rates are raised.
Should you get an FHR loan?
After all that has been said about this type of loan, the final question you would have to face now is – should you get it?
If you’re a person who does not trust banks and dread the thought of seeing your interest rate doubled up, then this type of loan is not for you. Instead, a SIBOR loan may help you get a good night’s sleep.
But if you’re a typical homeowner looking to acquire a property that is still under development, then this is the right loan for you. An FHR loan can help you save money during the first few years – which is likely the time when you need it most, especially if you are just starting your own family.
This loan would also appeal to property investors. One of the problems with properties under development is that they cannot be rented out. Although developers usually offer early bird discounts, this amount would not be enough to compensate the loss of rental income for three years.
To minimise the impact of the loss in rental income, landlords can take out an FHR loan, in which they pay lesser interest during the construction period. Once the property TOPs, it could be rented out to compensate for the hike in the spread.
An FHR loan may also interest short term investors, who intend to sell their property following the three-year Seller Stamp Duty (SSD) period. With this loan, they pay lower interest rates for three years when the property is still being developed, and then sell on the fourth year, when no SSD is payable. The lower the interest rate the bigger the profit upon resale of the property.
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