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Published February 21, 2007

New home mortgages clearer but not cheaper

Borrowers should take another look at packages based on Sibor or Swap offer rates


(SINGAPORE) The saying 'Be careful what you wish for because you might just get it' could apply to home loan borrowers who have complained about lack of transparency on interest rates.

They should take another look at the recent slew of new mortgages based on publicly available wholesale interest rates - because these are more expensive than packages that use bank board rates by 100 basis points or even more.

DBS Bank, United Overseas Bank and OCBC Bank have all introduced mortgages based on the Singapore Interbank Offered Rate (Sibor) or Swap offer rates - publicly available wholesale rates at which banks borrow from one another.

In recent months, the use of multiple board rates by banks for different home loans has come under fire from some borrowers, who have branded it opaque and confusing.

But clearer may not mean cheaper, which ultimately is what borrowers want.

Take DBS's latest Sibor-pegged mortgage with no lock-in period based on the 12-month Sibor plus one per cent. For the first year the effective interest rate is 4.411 per cent - the 12-month Sibor of 3.411 per cent (the rate on Feb 2, the first business day of the month) plus 100 basis points.

This is 116 basis points more expensive than the bank's floating rate-loan for the first year at 3.25 per cent. It is also 41.1 basis points higher than the first-year interest rate of 4 per cent charged for the bank's three-year fixed-rate loan.

Both the floating and fixed-rate packages are pegged to DBS's board rate, called the mortgage financing rate, which is now 4 per cent.

UOB and OCBC have launched similar transparent mortgage packages - based on published three-month, six-month or nine-month Swap offer rates plus 100 basis points.

The first-year interest rate on Feb 12 for a nine-month Swap-offer rate plus 100 basis points translates to 132 basis points more than the banks' current first-year rate for a floating-rate package.

Says OCBC's head of consumer secured lending Gregory Chan: 'Our variable-rate home loan packages are currently cheaper than the SOR (Swap offer rate) packages.'

People generally expect a wholesale price to be lower than a retail price. But wholesale interbank rates, although they reflect global interest rate directions in the long run, are also influenced by other factors, which makes them volatile in the short term.

One of these factors is intervention by the Monetary Authority of Singapore in the currency markets, which has a ripple effect on interest rates. Local banks, which are net lenders - they collect more money than they can - can price loans below Sibor or the Swap offer rates. And they do not have to react to each Sibor or Swap movement, which could be due to a one-off factor such as a major offshore acquisition by a Singapore entity leading to funds flowing out, or political unrest in the region resulting in funds flowing in because of Singapore's stable reputation.

But foreign banks, which are more dependent on the interbank market for their funding, generally raise and lower their interest rates more aggressively. Says Morgan Stanley analyst Matthew Wilson: 'Recall when Sibor jumped from 50 basis points to 350 basis points . . . and mortgage rates hardly changed, and when they did, only in small-step fashion. For a period of time, banks were losing money on mortgages.'

Sibor rose from 60 basis points in June 2003 to 350 basis points in June 2006, but over this period the local banks raised their mortgage rates only about 150 basis points.

Says DBS head of secured loans, consumer banking, Koh Kar Siong: 'Our guiding principle has been to manage the loan interest rate at a moderate pace to make sure that we are always taking into consideration our customers' and shareholders' interests.'

For loan packages pegged to the 12-month Sibor, adjustment is directly correlated to Sibor movements, be they up or down. Still, it is worth noting that such adjustments are specific and transparent.

OCBC's Mr Chan says the bank does not expect a flood number of applications for the new loan because it is likely to be relevant only to the needs and affordability levels of a particular type of customer. 'Customers for this new loan would typically be property buyers who are not only knowledgeable about interest rate trends but also relatively more savvy and active in the management in their finances compared to others,' he says.

Added DBS's Mr Koh: 'All loan packages are subject to the volatility of the interest rate cycle, and the reference point has always been the Sibor. Customers who prefer loan packages pegged to a publicly available index such as Sibor are clearly looking at transparent basis on interest rate adjustments for their loan and they do understand that there will be Sibor movements.'