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DBS offers insurance against interest rate hikes
Interest Guard is an add-on to existing mortgages and caps 3-month Sibor at 1% for the next 3 years
By: Siow Li Sen
[SINGAPORE] DBS Bank has introduced protection for home buyers against rising interest rates.
Called Interest Guard, the bank said yesterday that the insurance is a "first-of-its-kind mortgage offering to protect homeowners against rising interest rates".
Interest Guard is an add-on to existing mortgages and caps the three- month Singapore interbank offered rate (Sibor) at one per cent for the next three years, DBS said.
The three-month Sibor rate currently at 0.37533 per cent is the key interest rate used for mortgages.
"DBS Interest Guard will benefit homeowners who may be committed to an existing mortgage programme and those for whom refinancing may not be feasible given recent regulation changes," it said.
The Monetary Authority of Singapore (MAS) has tightened up on home loans to cool the property market, and existing borrowers may not be able to refinance under the latest rules.
Fen Peh, a DBS spokeswoman, said Interest Guard will help existing borrowers on a floating rate package. "That's because they may not qualify for refinancing to a fixed rate package," she said.
Last week, the MAS also said it is concerned that many households which have over-leveraged on their property purchases are at risk if interest rates rise.
"Many households could have over-extended themselves, fuelled by low interest rates and stretched loan tenures," said MAS managing director Ravi Menon.
"The vast majority of mortgage loans in Singapore are on floating rate packages, which means households will face higher monthly repayments when interest rates normalise," said Mr Menon.
Giving an example of how a hike in interest rates will hit borrowers, DBS said a single percentage point increase on a $500,000 mortgage currently paying 1.5 per cent will lead to a $237 increase in monthly repayments.
If the borrower had subscribed to Interest Guard for two years which would cost $50 a month, the increase on their monthly repayments would be $157. The total savings would be $30 a month.
Fear of interest rate hikes is leading more home buyers to take up fixed rate mortgages.
Over the last three months, the take-up for DBS's fixed rate packages has increased by more 65 per cent, the bank said.
It added that while rates are not expected to increase dramatically overnight, historical data has shown that it is not inconceivable for Sibor to increase by a few percentage points in a matter of months.
At the beginning of the global financial crisis, on Sept 26, 2008, Sibor rose by 0.47 per cent in a single day. Over the last five years, Sibor has risen as high as 3.56 per cent in July 2006 and reached a record low of 0.34 per cent in September 2011.
There is no commitment period required for Interest Guard and home buyers can opt to have interest rate caps of either one per cent or 1.5 per cent for the three-month Sibor over a protection period of two to three years.
The monthly cost for adding on the protection starts as low as $5 per month for every $100,000 loan outstanding.