Definition
Fixed Deposit Home Rate (FHR)
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The Fixed Deposit Home Rate (FHR) is an index rate used in homes loans as alternative to SIBOR or SOR.
It was conceptualized due to an extended period of extreme volatility in SIBOR and SOR after 2008.
How fixed deposit home rate works
The fixed deposit home rate is an indicator of the average fixed deposit rate (time deposits) which a lender offers consumers.
Because fixed deposit rates understandably varies with the length of time money is kept in the account, FHR comes with various subsets that can be observed by the number indicated with it. e.g. FHR8, FHR18, FHR6, etc.
This also implicitly means that the higher the number indicated beside FHR, the higher the index rate would be as longer fixed deposits would inevitably means higher interest earned by the borrower.
By this logic the lower FHR a housing loan applicant can go for is probably FHR1. But whether that is made available by a lender is another story altogether.
This is because a lender has to consider the little matter of profitability before releasing loan packages to the public.
If a mortgage has an interest package of FHR8 + 1% and FHR8 is 0.8%, then the total interest rate that the borrower would pay on the loan would be 1.8%. This rate would of course, change if FHR changes.
Because of the success of FHR loans in recent years, more and more banks are adopting this concept and labeling this instrument with their own fancy names.
By theory, FHR home loans mean that the cost of the funds a bank lends to a borrower would be equal to the interest they pay to depositors. So the only gross profit the lender makes would be on the spread.
So if a mortgage is offered at FHR + 1%, the lender theoretically only makes 1% on the loan.
Yet don’t be misled by financial jargon and how housing loans work.
A 1% interest on a $500,000 home loan is not $5,000 in interest charges. It’s over $65,000 in interest charges over the course of a 25-year tenure.
What’s the catch with FHR?
While FHR is marketed as an index that is pegged to the performance of fixed deposit rates to consumers, it is in essence a type of board rate loan.
This means that a lender would have the power to make changes to the FHR as and when they please.
Even though it is clearly mentioned that the FHR is based on the average of fixed deposit rates, there is no way a consumer can find out if a quoted FHR is indeed what it is supposed to be.
This is without mentioning that retail customers and high networth individuals do enjoy a higher fixed deposit rate than the regular saver.
All these information are kept internally with a bank and cannot be release to the public.
The argument against predatory practice by lenders in terms of hiking FHR is that the higher the FHR, the higher the bank would be paying on it’s fixed deposit account.
This would be like shooting themselves in the foot.
A simple way to test this is to walk into a bank and inquire about placing a fixed deposit with them.
Would the quoted interest on a 8-month fixed deposit be the same as a FHR8 quoted on a mortgage loan?
Are FHR home loans good?
Despite question over the transparency of how FHR is determined, the fact of the matter is that the payment rate on FHR loans been lower than regular SIBOR and fixed rate loans over the last few years.
This means that if you have not been on a FHR housing loan during the last few years, you have most probably been paying more than you have to on your mortgage.
Ultimately, if you are a long term borrower who does not want to stress yourself out with refinancing in the future, then the spread that comes with the loan should be a key focal point.
Between a high FHR and low spread against a low FHR with high spread, the prudent choice would be the former as the index rate can change over time while the spread remains the same.
However, for short term borrowers who have the full intent to refinance as soon as the lock in period expires, or would sell the house as soon as it’s profitable to do so, then going with home loans that have a very low interest rate in the initial few years would be more suitable.
If you are undecided, go with loan with a low spread over the long run.
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