Published May 9, 2007

Forget cheaper home loans

Banks aren't lowering rates despite the softening 3-month interbank, but are touting flexibility of their offers, GENEVIEVE CUA reports

BANKS are marketing the 'flexibility' of their home loan packages while they hold steady on mortgage rates, dashing consumer hopes that a softening three-month interbank rate would be cause for a cut in rates.

Customers, particularly the affluent, still have reason to cheer. Some banks like Citibank and HSBC offer clients home loans based on interest-only servicing for periods specified by clients. This is an attractive proposition as it maximises clients' cash flow at a time when asset values including property and rental collections are rising.

The most competitive bank in terms of rates appears to be Maybank. Competitors say that the relatively modest size of its home loans book enables it to be more aggressive. Its variable rate package starts at 2.78 per cent compared to other banks whose first-year rate is quoted at about 3.25 per cent. On the fixed rate front, Maybank's three-year scheme starts at 3.68 per cent, compared with DBS, for example, whose three-year plan starts at 4 per cent.

Maybank says that its home loans book has tripled, on a year-on-year basis, but declines to give any projection for the current year. The bank has just moved towards a single board rate of 3.75 per cent. Those affected by the change will get a 0.25 percentage point reduction in interest for 12 months.

On the outlook for interest rates, Citibank business director Tan Chia Seng says: 'Interbank rates did soften but they seem to have stabilised last week and this week, in fact rebounding a bit upwards. The impact on mortgage rates probably will not happen so fast . . . We can't see (a fall in mortgage rates) happening in the next few months. Singapore interest rates are actually the second lowest in the world, after Japan.'

He adds: 'Last year, our loan book grew 20 per cent. We're happy to see that but we're not going after market share for the sake of market share. What is more important is the value proposition.'

Singapore's three-month inter-bank offer rate, which provides a rough benchmark for deposit and loan rates, had been hovering above 3.4 per cent since last year, reaching a high of 3.56 per cent in July 2006. It started to fall in February, hitting 2.56 per cent on April 18. Since then, it has bounced back to yesterday's fixing of 2.625 per cent.

So far, deposit and mortgage rates have proved sticky. Deposit rates remain fairly low, except for the occasional promotional rate, and mortgage rates have also resisted gravity.

Selena Ling, OCBC Bank economist, says: 'There is a lot of liquidity in the market and that's a reflection of the capital flows into the region and not just into Singapore. That's exerting downward pressure on short term rates . . . We're looking for rates to stabilise at around the current level with three-month Sibor at 2.75 per cent by the year-end. That's just a bit higher than today's rate.'

If you're looking for flexibility, here's what you can enjoy at selected banks. As always, make sure you are comfortable with the fine print such as lock-in periods and penalties if they apply. Some banks, for instance, will charge a 0.5-1 percentage point penalty for home buyers who contract a home loan but sell the property before the loan kicks in.

The lower the interest rate, of course, the better. With any cash rebates, however, the bank is likely to stipulate a clawback should you make a full redemption within a specified period.

At Citibank, customers can avail themselves of a fixed rate or variable rate package, and couple that with a 'cash management' facility where there is a one-to-one offset between interest earned in a cash account and the loan rate. This is attractive for those who keep large sums of cash, and can ultimately shorten the repayment period. Priority banking customers can also avail of interest-only schemes for short or long periods.

Mr Tan says the schemes tend to be taken up by the affluent. 'Some may take an interest-only plan for three years with the freedom to prepay 50 per cent of the loan subsequently. Customers are not necessarily punting on property. They may have a certain investment and do not want to take profits on that yet as they see some upside. With this, they're not tying down too much of their cash flow.'

HSBC has since January allowed customers to customise their loans from a menu of interest rates, lock-in periods and repayment schemes. Customers can pick from fixed or variable rates, or have their accounts linked to a current account with the same interest rates. They can also decide between a no-lock-in scheme or lock-in periods of up to three years. There is also a 'step-up' scheme where customers can start with lower monthly instalments in the first few years, which subsequently increase. Or, a 'step-down' loan starting with a higher instalment.

Wendy Lim, head of personal financial services at HSBC, says: 'Our home loans have been and will be priced off one board rate, which is made available to customers and is benchmarked against the three-month interbank rate.'

There are also schemes where customers' loan rates are directly linked to a benchmark rate, typically the swap offer rate. In these schemes, however, the banks price a one percentage point spread, so the effective interest rate may not be attractive. UOB says it has received a 'healthy level of inquiries' on its scheme, called the CostPlus home loan.