Plunge in key interest rate may lead to home loans war

April 19, 2007

Plunge in key interest rate may lead to home loans war

Banks monitoring situation as interbank rate falls to 18-month low

By Erica Tay & Grace Ng

SINGAPORE'S benchmark interest rate plummeted to a fresh low of 2.56 per cent yesterday, raising the possibility of a mortgage war breaking out among banks here.

Cheaper home loans could be on the horizon if the key interbank rate, which influences consumer loan and deposit rates, keeps falling.

The rate, the three-month Singapore interbank offered rate (Sibor), is at an 18-month low after being largely stable for more than a year. It started racing downwards about seven weeks ago, and has dropped by more than 0.8 of a percentage point.

However, bankers are not rushing to cut lending rates, preferring to wait and see if the big drop is here to stay.

Industry watchers predict that it will take a 'first mover' bank eager for mortgage market share to start cutting loan rates - and then its competitors would follow suit. Home loan rates are now mostly around 3.25 per cent to 4.5 per cent a year.

Foreign banks here are likely to reap lower funding costs from the plunging Sibor - as they rely on the interbank market for funds - and so can afford to dangle cheaper loans. This is because, unlike their local competitors, they do not have a large pool of cheap deposits to tap.

Analysts are pondering whether the market is set for a repeat of the 2004 mortgage wars, when foreign banks took advantage of a record-low Sibor to woo borrowers with ultra-cheap loans.

UOB Kay Hian analyst Leng Seng Choon said: 'It all depends on how the banks view the fall in Sibor, whether they think it is sustainable at this low level. It also depends on whether there is a first mover.'

A top foreign banking executive said: 'We have been crunching the numbers to see how much we can cut rates by, since mortgage rates are a key weapon in growing our home loans book and market share this year.'

An initial quarter-point cut is possible if the Sibor drop is found to be sustainable, he said, adding: 'All the banks are very wary of sparking off any mortgage war, but as a foreign bank, we need to make sure we are not a laggard if any mortgage war erupts.'

Sibor could even fall much further, predicted Citigroup economist Chua Hak Bin. 'Within the next few months, we cannot rule out the three-month Sibor falling to 2 per cent,' he said.

As customers clamour for lower loan rates, bankers wish to monitor Sibor trends longer. Ms Elaine Heng, Stan-

dard Chartered Bank's general manager of mortgages and car loans, said: 'The Sibor dropped drastically over a short period, so we are still waiting to see if this decrease is sustainable.''

A local banker quipped: 'Customers' memories are very long. They keep telling us that just two years ago, mortgage rates were as low as 0.75 per cent but they crept up to 3.5 per cent in less than a year.

'Now with Sibor falling below 3 per cent, some of them are making even more noise.'

Citibank Singapore business director Tan Chia Seng said that increasingly, the fall in mortgage rates is influenced not only by interbank rates, but also by other factors such as a bank's competitive strategy.

'Traditionally, mortgage rates tend to lag behind deposit rates and interbank rates by a few months,' he said.

'While we aim to be a leading player in this market, we will not play the market share game for the sake of grabbing market share.'

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