Interest rates

Singapore Interbank Offered Rate (SIBOR) is a reference interest rate at which banks offer to lend unsecured funds to other banks in the Singapore wholesale money market. Set by the Association of Banks in Singapore (ABS), SIBOR reflects the true cost of money in the interbank market; it is commonly used in the Asian region.

Prime (lending) rate is a reference interest rate used by banks. It originally indicates the rate at which banks lent to their most favoured customers. Some variable interest rates may be expressed as a percentage above or below prime rate. Movement of the prime rate usually reflects the changes of mortgage cost.

Perhaps in order to decrease transparency, major Singapore banks now use own names for the reference rate of their home loan products, e.g. DBS calls it Value Mortgage Rate (VMR) at 4% now, OCBC names it Value Rate currently at 4.5%, UOB calls it either HomePlus Rate or UOB Mortgage Rate both at 4.5%. Various home loan products are then expressed as a percentage below that rate.

The above chart is derived from Monetary Authority of Singapore data over the past 10 yrs.

In the yellow area or the first 5-6 yrs before 2002, both the prime lending rate and deposit rates are well dependent on the SIBOR, which I think is fair: banks offer competitive deposit rates close to their true cost of money in the interbank market; the 2~3% higher lending rate produces a reasonable profit though the profit margin became larger after the 1999 peak in rates.

Banks have changed the rule since 2002 (refer to the gray area). Despite the SIBOR had significantly risen to 3.5%, banks stick on offering the ridiculously low interest rate to their retail customers. Instead of making money only from their lending business, banks now target the deposit customers to claim profit. This is in line with the practice that banks started to charge on cheque books & low-balance accounts a few years ago.

Banks now do not offer competitive interest rate but create more sophisticated products to attract funds from retail market. Structured deposit has evolved from simple equity/bond-link interest rate to something complex enough to confuse most of their customers, which then can be designed in more favour to the banks. Actively selling investment products (e.g. unit trust) is another way of making more money (and probably commission too!); even the counter staff is eagle to convince customer with high-balance account to buy their more profitable products rather than to proceed with the deposit instruction.

The 'best' interest rate currently offered at various Singapore banks:

• Maybank iSAVvy for 6-m: effective 1.98% if >$25K, or 2.38% if >$50K
• Citibank MaxiSave Sweep: 1.88% (2.08% for >$50K) for 6-m unfixed deposit or 1.28% on withdral amount
• Standard Chartered e$aver: 1.20% p.a. (just dropped from previous 1.5% w.e.f. 1 Nov.) 1.70% for >$50K.
• UOB for 6-m time deposit: 0.6% if <$50K, otherwise 1.70%
• OCBC for 6-m time deposit: 0.575~0.6% if <$50K, otherwise 1.70%
• DBS for 6-m time deposit: 0.575% if <$50K, otherwise 1.70%