June 15, 2007


Will banks deliver on better mortgage disclosure?

ABS guidelines on rates kick in today but some home owners say these fall short of the mark


AFTER five months of anticipation, home owners will today get to judge for themselves whether Singapore banks have delivered on their promise of greater clarity on home loan rates.

But the early signs are that the new guidelines - drawn up by The Association of Banks in Singapore (ABS) - will not end the rising tide of complaints from home owners with mortgages.

The much-heralded guidelines kick in today. ABS says they are 'concrete steps' to educate customers on how home loan packages are structured and how they can change.

Home owners complain of two key problems: They are kept in the dark on why rates are jacked up promptly but cut slowly, and they cannot compare board rates across banks - or even various board rates at one bank.

Comments from readers of The Straits Times suggest the guidelines still fall short of the mark.

Home owners such as Mr KF Choo, 45, sent e-mail messages demanding 'satisfactory answers' from banks on why mortgage rates have not budged even though the Singapore Interbank Offered Rate (Sibor) has fallen in recent months.

The guidelines say banks must clearly disclose key indicators these rates are pegged to, such as the Central Provident Fund rate or Sibor. Banks must also explain rate changes and give a revised payment schedule on request.

But the guidelines do not go far enough in educating customers with floating rate loans, who are told their board rates track interbank rates.

Customers are not told why banks also differ greatly in the type of rates they use for different board rates. Some use the six-month Sibor or 12-month Sibor, for instance, or a combination plus internal rates. So a common customer practice of scrutinising only the three-month Sibor may not be enough to gauge why rates go up.

Banks disclose the specific rates used at their own discretion. And banks will now simply reveal the financial indicators without explaining the extent to which the changes in floating board rates track these external rates.

This is hardly an improvement on the current vague reply to customers seeking an explanation: 'Our current board rates are based on the internal cost of funds, which takes into account interbank rates, and other pertinent factors.'

What customers really want to know, says Consumers Association of Singapore executive director Seah Seng Choon, is whether the banks are 'playing fair by adjusting rates by the same extent - whether up or down' in line with Sibor or other publicly available indicators.

To tackle this, some say Singapore banks should benchmark all board rates directly to a public rate like the three-month Sibor - similar to Britain's Standard Variable Rate, about 2 percentage points above the Bank of England rate.

'As long as there is no explicit tag to a publicly available interbank rate like Sibor, the extent of change in board rates and the timing of such adjustments may continue to be of concern for the customer,' said Mr Geoffrey Ying of financial advisory firm New Independent.

A standard benchmark may also help with customers' second grouse: the plethora of board rates for different banks' packages and even various tranches of the same package at one bank.

Home owners have voiced frustration that banks seem to exploit the opaqueness of multiple board rates to lift these different rates by varying amounts without explanation.

Ms CY Lee, a 43-year-old manager, said: 'How can the bank refuse to explain to me why it raised my board rate four times in eight months, but gave only one rate hike of 0.5 percentage point to my neighbour who got the same loan package just a month after I did?'

The guidelines do not clarify this mystery of multiple rates - they just require banks to quote the board rates for a customer's package.

Also, potential home loan customers like Ms Joanne Ng, 35, are asking for a clearer method to compare the cost of interest of different loans, instead of using headline board rates.

The answer, says ABS, is in its new consumer guide, advising consumers to focus on the effective interest rate (EIR) - the cost of interest annually over the whole loan. But the EIR is worked out using prevailing rates and different board rates change by different amounts over time, so it is of limited comparative use.

Some banks, such as Maybank and HSBC, have switched to a single board rate benchmarked against Sibor.

But banks strongly resist this 'ideal' transparent system of making it mandatory to peg all board rates to standardised public rates.

They say pegging this would force all customers - including those who dislike volatility in mortgage rates - to be exposed to interbank fluctuations. It may also be more expensive if Sibor soars. Banks say multiple rates are necessary because their loans use different types of funding for loan packages with different features.

Banks say if they adopt a single board rate, some customers may suffer more than others whenever it is raised, say, by 1 percentage point. For instance, a customer on a fixed rate loan may then have to fork out 6 per cent, while another pays only a 3 per cent floating rate.

Transparency may see more price competition but may cut profit incentive to offer innovative products. As one banker said: 'Customers demand banks reveal exactly what ingredients go into their mortgage packages. But this is like demanding the chef of Singapore's most famous chilli crab reveal his secret recipe to explain why his dish is better than his competitors'.'

The ABS guidelines are just that - guidelines. At best, they 'manage customers' expectations beforehand to assuage some unhappiness', said Mr Goh Eck Hong, the spokesman for housing loan adviser Happy House.

But if the ABS is 'committed to promoting fairness and transparency in banking practices' for customers' benefit as it claims, then have these guidelines gone far enough?

Customers will see for themselves today.

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'As long as there is no explicit tag to a publicly available interbank rate like Sibor, the extent of change in board rates and the timing of such adjustments may continue to be of concern for the customer.'

MR GEOFFREY YING, of financial advisory firm New Independent