June 27, 2007

DBS first to make home loan rates transparent

Its mortgage offers will use just one variable rate pegged to interbank rate


DBS Bank has become the first bank in Singapore to adopt full transparency in home loans by pegging all its packages to a public benchmark rate.

The move - described by DBS as 'creating a new playing field' - means it will use just one single variable rate in its new mortgage packages which will be pegged to the 12-month Singapore Interbank Offered Rate (Sibor).

Sibor is the rate at which banks lend to each other and because it is publicly disclosed, customers can get a clear indication of how their mortgage rate is calculated.

But it may not mean cheaper loans as Sibor reflects market forces, so customers may in fact be paying more than existing rates at certain times. But if Sibor falls, DBS customers could benefit more as other banks may be slower in lowering rates in tandem with market rate movements.

DBS' move kicked in on June 15, the same day new industry guidelines took effect to give customers more clarity on how their mortgage rate changes over time.

DBS said its new policy is designed to 'give customers more certainty about how their rates are determined'.

Its new floating rate loans will now be pegged to the 12- month Sibor - which is now at about 2.56 per cent plus a mark-up of 1.25 per cent added by DBS. This gives a floating rate of 3.81 per cent.

In contrast, OCBC Bank's floating rate package is 3.25 per cent in the first year but hits 4 per cent in the third.

The 12-month Sibor for new packages is revised monthly depending on interest rate movements while DBS can alter the premium component as it wishes.

'This is what customers have been asking for...we are now taking the lead to set a new standard for more benchmarked board rates,' said DBS' head of home loans, Mr Koh Kar Siong.

New customers will also avoid volatility as the 12- month Sibor for their particular package is adjusted annually in line with market forces, while the premium part is fixed for the loan duration.

DBS will also continue to offer its POSB Home Ideal package pegged to the Central Provident Fund rate, which is highly stable.

Consumer Association of Singapore executive director Seah Seng Choon praised DBS' move: 'We believe consumers will benefit as the interest rates are better understood. We expect the other banks to announce their own formula so that overall transparency will be enhanced.

But other banks are not following suit just yet. OCBC said the needs of customers 'have become increasingly diverse' so it is keeping its suite of fixed and variable rate packages and loans pegged to the Swap Offer Rates. These comprise the Sibor plus a bank's lending costs.

'On occasion, our loan packages may come with promotional interest rates that will be lower than our regular board rates,' said Mr Gregory Chan, OCBC's head of consumer secured lending.

Mr Kevin Lam, head of United Overseas Bank's loans division, said the bank reviews its packages to ensure they are competitive.

Banking analysts noted that DBS had undertaken 'a bold move' as the effective rates of its new packages could in fact be higher than those of its rivals that have not pegged their rates to the Sibor. They may even be higher than DBS' previous rates.

But Mr Koh said there cannot be 'a direct apples-to-apples comparison' between DBS' Sibor-linked rates and other banks' rates. 'You would just be comparing DBS' clear box to other banks' black box.'

One analyst noted that DBS may have to offset a 'marginal loss of market share with the higher spreads it can earn from charging a premium on the Sibor'.

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