BT, Published February 8, 2006
Tips for financial housekeeping

Home loan restructuring, money market funds and one-year structured deposits can help stretch your dollar

THE start of the year is as good a time as any for financial housekeeping. And one of the first items on your checklist should be: How can you make your cash work harder?

Save for the occasional short-term promotional deposit rate, interest rates for savings and fixed deposits remain low, even though interbank lending rates have shot up. This creates a gap between the rate that you earn for cash on deposit and the rate that you pay for a loan. What concerns consumers the most is their home loan.

There are ways, however, to narrow the gap, without tying yourself down to any long-term deposit or investment scheme. As for your home loan, you may have to brace yourself for some hikes, at least in the short term. As far as Executive Money can ascertain, most banks have stayed their hand on any rate hikes this year, after around three increases on average last year. Citibank, however, has raised its board rate for home loans this year.

The most-watched indicator for loan rates is the three-month interbank rate. This is the rate at which banks lend excess deposits to other banks, and influences the rate borrowers pay on their loans.

Last year, the three-month Singapore interbank offer rate (Sibor) shot up 187 basis points from about 1.5 per cent in January to over 3.2 per cent in December, with the biggest spike in November. It has since continued to edge up and now stands at 3.375 per cent. Selena Ling, head of OCBC treasury research, says the three-month interbank rate could creep up to between 3.5 and 3.8 per cent in the next three to six months, but looks 'toppish'. 'We may have a situation where we see some overshoot.'

For those nervous about further rate hikes, more banks are bending over backwards to offer flexibility in terms of an interest rate view for home loans. With DBS, for instance, you can tie up portions of your home loan in fixed-rate schemes for as short as one year or as long as 10 years. But the big questions are: How long is too long a fixed-rate tenor? And for those nervous about interest rate volatility, how much of a premium should you pay for peace of mind?

Seeking higher savings rates

Plain vanilla savings rates remain abysmally low at most banks at between 0.25 and 0.4 per cent. Even for fixed deposits, unless you have more than $50,000, modest sums still earn less than one per cent.

For those with less than $50,000, a number of promotional schemes are still open. DBS, for instance, still has its Chinese New Year offer of three-month deposits earning 2.688 per cent per annum. This applies for amounts between $20,000 and below $50,000. For higher amounts up to $1 million, you can earn up to 2.98 per cent for a 12-month tenor.

For those with at least $50,000, the highest rates appear to be those offered by foreign banks. With HSBC, $50,000 in fresh funds can earn 3 per cent per annum for a six-month tenor. Citibank, with its 'unfixed' deposit scheme, will pay 3 per cent per annum for deposits of at least $200,000. For those with at least $50,000, splitting that into a unit trust or single premium insurance plan will fetch 3.6 per cent per annum for your deposit.

But what other alternatives are there? What you should note is that the Singapore yield curve remains pretty flat, even though it is relatively steeper than the US yield curve. This means that there is little reward for tying yourself down to long-dated investments like endowments or structured deposits of more than three to five years.

OCBC and Standard Chartered Bank do offer currency-linked structured deposits of just one year in maturity, that could offer a pick-up in yield above deposit rates. But there are alternatives. Money market funds, for instance, can offer a pick-up of at least twice the average fixed deposit rate. Phillip Capital's Neo Chiu Yen, director for investments, says money market funds are for those 'who are concerned about liquidity, and are very particular about price risk'. Based on MAS requirements, the bulk of such funds should be invested in short-dated paper of up to 12 months. This means a fund can take advantage of short-term interest rate rises to reinvest coupons and principal amounts. 'Right now we see credit spreads of commercial paper narrowing against what we can get from the Sing deposits. . .We're very selective on the credits,' Ms Neo says.

Lion Capital's Daniel Choy, head of central dealing and cash management, manages the firm's money market fund, which returned 1.77 per cent in the 12 months to Jan 27. Last year was 'tough', he says. Interbank rates spiked, but with the fund's average maturities at four to six months, it took some time to take advantage of the spike. The fund was the best among its peers, but it under-performed its benchmark of one-month Singapore Interbank bid rate (Sibid) by 10 basis points. 'Going forward, unless rate volatility picks up again, we should continue to outperform.' Money market funds, he adds, are an asset class 'that needs to be sold'. 'There is a gap in the market; people need to get out of the misery of low rates.'

Yet another alternative is short-term bond funds, which can hold bonds of up to five to six years. DBS Asset's Enhanced Income Fund has so far consistently outperformed its three-month Sibor benchmark. 'This fund is almost like cash, with T+1 liquidity,' says senior portfolio manager Rachana Mehta. The latter means that settlement or payment is one business day after your transaction.

'This gives people a good alternative; it's very low risk. Capital preservation is important so we go into high quality corporate, government and quasi sovereign bonds,' she says. In the 12 months to Jan 27, the fund returned 2.3 per cent. Last year, it beat Sibor by a whisker.

There are no sales charges on money market funds, and an annual management fee of 0.25 per cent applies. For DBS Enhanced Income Fund, the sales charge is 0.2 per cent and the management fee 0.3 per cent.

Looking for a fix

If you have a home loan, as most Singaporeans do, you may be wondering whether you should tie yourself to a fixed-rate mortgage. For those who can't decide on a fixed or variable-rate loan, a number of banks offer the flexibility of slicing your loan. A minimum loan size, however, may be required.

Citibank was the first last year to launch a five-year fixed-rate package with a twist. The scheme - priced then at 3.85 per cent a year - will pay you a 'bonus' if rates fall below a specified floor. Citi, by the way, has upped this five-year rate to 4 per cent, and the floor has been raised from 1.75 to 2 per cent.

DBS's Managed Mortgage offers as many as 10 options, and you can fix your loan rate for up to 10 years. At UOB, the flexibility to slice up your loan 'has always been there'. 'We can fix a loan rate for up to five years,' says Kevin Lam, UOB's loans division head. 'We did a market survey recently and found that the segment wanting to fix a loan rate for more than five years was few and far between.'

The rub is that you have little visibility of interest rates for any long period. You are also charged a premium for the assurance of a long fixed rate. That premium, based on the current Singapore bond yield, appears excessive. For example, the 10-year SGS yield stands at about 3.32 per cent. DBS's 10-year fixed rate is 5.25 per cent, spelling a premium of 1.93 per cent.

Says Chris Firth of dollarDex Investments: 'It's asking a lot of the average consumer to take any view, as even professional economists tend to get interest rate forecasts wrong on a regular basis. Even with some economic knowledge, it's reasonable to take at most a five-year view.

'If borrowers see (fixed rate options) as a way to 'gamble on rates going up' they probably should assume they've only got a 50:50 chance of being right. Personally I see rates reaching a peak this year then perhaps a few years of stable or lower rates.'

DBS' modelling of its own blended rate, assuming various combinations of fixed rate options, against competitors' schemes shows savings over a long term.

MayBank launches iSavvy Saving Account

Open an iSAVvy Savings Account now and enjoy 2.38%* p.a. for 3 months! In addition, get 6%** interest-on-interest every 6 months

* Offer is valid for a limited period only. Minimum average daily balance of S$5,000 needed to enjoy the promotional rate.
** Average monthly balance of S$5,000 must be maintained in the iSAVvy Savings Account for each six-month period.

N.B: After that, the interest will be at 1.38%

Fee and Charges

iSAVvy Savings Accounts
Minimum Initial Deposit S$10
Minimum Balance Fee S$2 per month if average daily balance falls below S$500
Cash Deposit Over The Counter S$5* per deposit (Waived for 1st deposit on account opening, charge applies for subsequent deposits.)
Cash Withdrawal Over The Counter S$15 per withdrawal
Balance Enquiry Over The Counter S$5 per enquiry
Early Account Closure S$30 if account is closed within 6 months
Cashier's Order Issuance / Amendment

- Account Holder S$10.00
- Non-account Holder S$15.00
- Lost Cashier's Order/Cancellation/Stop Payment S$25.00