Era of cheap money but no fixed rate housing loans

DBS named Social Enterprise Champion of the Year at President's Challenge Social Enterprise Awards 2019.... (DBS.com Dec 2019). OCBC the best consumer bank in the world, while DBS the best bank for SMEs.... (Global Finance Oct 2019). S’pore’s big 3 banks among world’s 10 strongest.... (Bloomberg Market Ranking 2015). DBS named world’s best bank.... (British magazine Eurmoney 2019).

With all these accolades, tiny Singapore must be so lucky to be so well-served by our local banks. In the domestic market, banking regulations protect our banks in Singapore dollar transactions. Have they in turn worked hard and innovatively for the benefit of Singaporeans generally?

More specifically, have banks provided Singaporeans with the best options in housing loan? This is acutely important given that Singapore has the highest home-ownership rate in the world at 91% (2018). This is the ratio of owner-occupied units to total residential units. Only Romania has a higher rate than us.

Singapore housing loans are all basically priced on variable rates. The rates are computed as some basis points above a referenced rate and move up and down with the latter. The reference rates are Singapore Interbank Offered Rate SIBOR), Singapore Swap Offered Rate (SOR) or a rate determined by the bank (e.g. internal board rate). The banks may offer the gimmick of a fixed rate for the first one or two years, followed by the usual variable rates.

There are NO 30, 20, 10 or even 5 year fixed term housing loans in Singapore. What advantages do fixed term loans offer? Well the monthly payments are fixed over the life of the loan. Home buyers can plan their affordability and do not worry about the volatility of interest rates. For big ticket items like housing loans, an increase of just 1% pa interest rate can cause serious financial hardship. Back in 1984 when loan interest rates shot up to 13% pa, many borrowers were taken to the laundry.

Fixed rates are perfect for borrowers where the house is like forever. Of course anything can happen, like a divorce, emigration, foreign job posting, etc so some terms need to be considered like whether the loan is portable, early repayment charge is not too high, refinancing is allowed, etc. Long term fixed rates are normally a little higher than short term variable rate loans, the longer the tenor, the higher the rate. This spread depends on the banks cost of funds for their short and long term borrowings which is a function of the short/long term yield curves. Fixed rates allow home buyers the choice to lock in their commitments, especially during periods when rates are low. The past decade or so has been an era of extremely cheap money but the market does not offer Singaporeans the opportunity to lock in their loans at low fixed rates for the long term.

Singapore 10-year Interest Rate from Jun 1998 to Dec 2019

The Monetary Authority of Singapore (MAS) issues Singapore Government Security bonds (SGS) with maturities of 2,5,10,15,20,30 years. Singapore runs on balanced budgets so MAS does not borrow for operational needs purposes. The SGS program is for the purpose of creating SGD long term yield curves so that the market has a benchmark to price itself. The funds raised from SGS are kept separately to be used solely to service these bonds. The MAS has done its part to create the tools for SGD fixed income market, but banks are not biting.

The chart above shows the SGD 10-year yield curve. The years 2003, 2011,2012,2013 for example, were excellent times for borrowers to lock in their housing loans at very good rates had long term fixed rate housing loans been available.

Long term fixed rate housing loans are not uncommon in other countries. For example, Japan's  “Flat 35” loans are long-term fixed-rate mortgages that can be repaid between 15 to 35 years, UK has 15 year fixed rates, Australia 19 years, even Malaysia 5-35 years fixed rates are possible.

The US has the best developed housing loan market in the world where 2 out of every 3 loans are fixed rates with 30 year tenor. Financial derivatives add another dimension to the US market. The loans are bundled into mortgage-backed securities (the mortgages, subject to uniform underwriting standards, are typically guaranteed by the government-backed mortgage-finance companies Fannie Mae and Freddie Mac). These securities are purchased by investors who take on the risk of future rate changes. Securitising these loans into financial derivatives allow the huge amount of capital tied up in housing loans to be recycled by the banks into more mortgage loans or other business. This adds more liquidity to the market, making for cheaper loans to borrowers.

The US subprime housing mortgage crisis of 2007 was caused not by the system, but by too much government interference in the free market. The Community Reinvestment Act forced banks to extend housing loans to people who would not have been able to borrow. This caused housing prices to rise dramatically and FED rate was raised to dampen the market. The increase in FED rates created financial burdens on those who borrowed on variable rates tied to FED rates. When housing market tanked, home owners sold or were foreclosed at huge losses and defaulted on their mortgage loans. This turned the financial derivatives into junk bonds as the underlying borrowers were of poor credit ratings.The housing crisis then turned into a banking crisis.

Danish bank launches world’s first negative interest rate mortgage

In an era of cheap money, Singapore home buyers are missing out a great deal on the opportunities that fixed rates can offer. When yield curves get inverted, ie when longer term rates are lower than shorter term rates, it is a good time to lock in long term commitments. This happened with the USD recently. In August 2019 the third largest bank in Denmark, Jyske Bank, began offering borrowers a 10-year deal at -0.5%. Borrowers continue to make monthly payment, but their payments will be less than what they borrowed since the interest rate is negative.

Jyske Bank is the first to offer fixed negative rates for a long term loan. Another Danish bank, Nordea, says it will begin offering 20-year fixed-rate deals at 0% and a 30-year mortgage at 0.5%.  

Are Singapore banks up to this? Not by a long shot. They have a captive market, why bother with running a more complex loan portfolio. The Ulu Pandan Condominium project of DBS Realty in 1977 was perhaps a lesson Singapore banks never forget. DBS was the major lender with a first time ever fixed rate in Singapore for the first 10 years at 9% pa. When interest rates climbed in the 1980s, DBS starred at tremendous losses. It was obvious domestic bankers lacked the skills in managing their interest rate ladders in those days. In stepped MAS and government to sort matters out. Sanctity of contracts went out the window, borrowers signed new mortgages with more expensive variable rates, and DBS survived to become the best bank today. Singapore consumers? Suck it up, folks.   .