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Super-cheap home loans unveiled
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Two foreign banks offer new low rates in bid to entice mortgage market
TWO foreign banks operating in Singapore have just unveiled rock-bottom home loan deals in a bid to secure a bigger slice of the fast-growing mortgage market amid record private home sales.
Market observers say it is too soon to say if a full-blown mortgage rates war will erupt – but the latest rates are sure to get the attention of home hunters.
One key factor allowing super-cheap mortgages is the fact that a key interbank rate, which influences consumer loan and deposit rates, is tipped to stay at depressed levels well into next year.
The rate – the three-month Singapore interbank offered rate (Sibor) – is hovering at 0.68 per cent, near the all-time low of 0.56 per cent back in June 2003.
With such cheap funds on hand, HSBC has just launched a mortgage package with an interest rate of Sibor plus 1 per cent throughout the loan term.
This is a steal, compared with its Sibor-pegged loyalty package, with interest rates of Sibor plus 1.3 per cent in the first year, Sibor plus 1.2 per cent in the second, and Sibor plus 1.1 per cent after that.
Customers can save about 7 per cent in interest payments for a loan of $600,000 over 20 years, the bank said.
The package, available until Sept 30, is for both completed and uncompleted homes with a minimum loan size of $300,000.
It has no lock-in period and is for existing customers. Non-HSBC customers who want to get on the scheme must park at least $50,000 with the bank.
The other new cheap deal is from a small player, State Bank of India (SBI) Singapore. It is offering a jaw-dropping Sibor plus 0.6 per cent for the first year, Sibor plus 0.8 per cent for the second and Sibor plus 1 per cent for the third. The package is for completed properties only, and not for buildings under construction.
Sibor is very low now as it closely tracks the US Federal Reserve Fed funds target rate, which is near zero.
The earliest that the US Fed funds rate may be raised is in the second quarter of 2011, says Barclays Capital economist Leong Wai Ho.
Rates here are also near an all-time low because of measures taken by the Singapore authorities to keep plenty of liquidity in the system, given the global recession.
Bankers say some lenders have slashed the spreads they charge on Sibor-pegged loans to grab a bigger share of the red-hot home loans pie. This is in sharp contrast to several months ago when banks reportedly tightened lending criteria amid a bleak economic outlook and falling home valuations.
SBI Singapore is a much smaller home loans player here than the three Singapore banks – DBS Bank, OCBC and United Overseas Bank. Its eye-catching offer is unlikely to move market rates, say market observers.
‘We’re not talking about market share as we’re new, but we really want consumers to know about us,’ said Mr Seah Boon Ching, head of consumer banking at SBI’s Singapore branch.
He said the bank secured some funds at a ‘very competitive rate’ and decided to pass this on to consumers via a very specially priced home loan package to commemorate Singapore’s National Day.
It remains to be seen whether a mortgage war will erupt.
Foreign banks do not have a large pool of cheap deposits to draw upon. Still, if Sibor remains low, they can tap low funding costs and so can afford to dangle cheaper loans.
RHB Bank Singapore’s country head, Mr Lim Hun Joo, said the bank is not keen to compete only on pricing, as ‘there is a real risk of the bank incurring losses as a result of simply chasing after growth in their loans portfolio’.
‘In fact, there have been banks that have suffered losses only in recent years as a result of offering fixed-rate loans at rock-bottom pricing,’ said Mr Lim, who declined to name these banks.
Another banker said the local banks ‘have been relatively quiet so far’, but if property transactions accelerate further and the economic recovery continues, then there might be a rate war as the trio ‘scramble for market share’.
Still, banks do not always compete on interest rates alone and some offer innovative products that set them apart.
Standard Chartered Bank’s MortgageOne Optimizer, for instance, comes with an offset feature where customers can use interest earned on deposits to reduce the interest payable on their home loans.
Meanwhile, Citi’s Home Saver is an index-linked home loan that offers customers one of the widest selections of index tenures in the market, ranging from one month to three years.
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Bankers say some lenders have slashed the spreads they charge on Sibor-pegged loans to grab a bigger share of the red-hot home loans pie. This is in sharp contrast to several months ago when banks reportedly tightened lending criteria amid a bleak economic outlook and falling home valuations.
Source: Straits Times, 19 Aug 2009
New home loan deal from HSBC at Sibor plus 1%
(SINGAPORE) HSBC has offered a new home loan that pegs interest rate to the three-month Singapore Interbank Offered Rate (Sibor), plus a spread of one percentage point.
The rate will be applied throughout the loan tenor and is valid for both completed and uncompleted properties with a loan size of at least $300,000.
There is no lock-in period, which is how long you would otherwise be tied to the bank and which allows it to penalise you if you decide to redeem your loan early.
HSBC’s new loan offering comes as interbank rates are expected to remain tepid in the short term, especially as a speedy economic recovery is not on the horizon.
In comparison with the bank’s current Sibor- pegged ‘loyalty’ home loan package – which charges spreads of 1.3 points for the first year, 1.2 points for the second year and 1.1 points subsequently – this new home loan could save about 7 per cent in interest payments for a loan size of $600,000 over 20 years.
The calculation assumes Sibor to be at 0.686 per cent as at Aug 3.
The new home loan is available to all existing HSBC customers who have an account, credit card or investment with the bank, and is part of the bank’s ‘relationship-based home loan’ programme.
No minimum balance requirement is required for the offer. Current HSBC home loan customers can also apply for the new home loan package if they wish to review their loan.
Customers who have no account with HSBC can apply for this new home loan after they deposit at least $50,000 in deposits, investments or insurance with the bank.
HSBC’s new home loan offer is available until the end of next month.
Source: Business Times, 18 Aug 2009
Banks woo home-buyers in new ways
Lenders offer innovative and varied products, moving away from old strategy of using low interest rates
THE recent surge in HDB and private home sales has seen a pick-up in the pace of lending among banks, which have come up with new and innovative loan products to lure home-buyers.
Compared to the first quarter, the second quarter saw the number of approvals more than doubled, said Mr Gregory Chan, head of consumer secured lending at OCBC Bank.
‘We continue to see double-digit growth in sales, with a 30 per cent quarter-on-quarter increase in new mortgages as of Q2 2009,’ said Mr Dennis Khoo, general manager of retail banking products at Standard Chartered Singapore.
Banks are introducing more variations in their loan products, not only to seize market share but also, in part, to avoid the old ‘How-low-can-you go?’ war of interest rates.
‘The best mortgage is not necessarily the one with the lowest interest, but the one that best suits a customer’s needs,’ said Ms Sherry Leong, business head for home financial services at Citi Singapore.
‘We consider it important to offer product innovation and differentiation along with good after-sales service that is relevant to our customers’ needs.’
The Straits Times surveyed seven lenders and found many variations of the traditional fixed- or floating-rate mortgages. They include loans that allow changes in loan tenures, offer loyalty discounts, and even a few that earn interest like a savings account.
For example, United Overseas Bank’s latest HomePlus loan allows customers to earn the same interest rates on their deposits – of up to 75 per cent of their outstanding loan amount – in a separate bank account.
According to UOB, customers have the option of using the interest earned to offset their loan’s interest.
Promotional rates for UOB’s HomePlus are now at 1.5 per cent for the first year, 2.99 per cent for the second and 4.5 per cent for the third. But depending on the deposit amount maintained in an account with the bank, an implied interest rate on the home loan can be as low as 1 per cent in the first year and up to 3 per cent in the third year, said UOB.
StanChart’s MortgageOne Optimizer also comes with an offset feature where customers can use the interest earned on their deposits to reduce the interest payable on their home loans.
‘It is a smart money manager that
optimises the deposits and mortgage loans of home-owners…automatically optimising returns by using the lowest interest-earning deposit accounts to offset the highest interest-paying loans,’ explained Mr Khoo from StanChart.
Aside from an interest-offset feature that helps customers pay down their home loans faster, Citi’s Home Saver is also an index-linked home loan that offers customers one of the widest selections of index tenures in the market, ranging from one month to three years.
With that, customers have the flexibility to switch from one tenure to another when the loan hits its maturity date, enabling them to react periodically on when to fix or float their interest rates, depending on their view of market trends.
‘For instance, clients can take advantage of the low one-month Sibor now and then change to a 12-month Sibor later when they feel that interest rates are likely to rise, thereby fixing the rate on their instalments for that period,’ explained Citi’s Ms Leong.
‘Conversely, a client who has chosen a six-month Sibor initially can switch to a one-month Sibor if he believes that interest rates could ease in the coming months.’
However, traditional heavyweights in the home loans market such as DBS Bank, OCBC and Maybank say plain vanilla loans with low fixed or floating rates linked to Sibor, or SOR, continue to remain popular, especially in today’s low interest rate environment.
One particular feature in DBS’ fixed- rate loans is the flexibility – which is usually not available for fixed-rate packages – of allowing customers to partially pay for their loans at any time within the period.
While DBS offers customers more freedom in managing their home loan, HSBC introduced a special feature to keep their customers banking with them.
‘We are the only bank to reward customers for keeping their home loan with us by giving them a loyalty discount, in the form of a year-on-year decrease in the interest rate spread charged,’ said Mr Sebastian Arcuri, head of personal financial services at HSBC Singapore.
‘This benefit is also ‘portable’, giving customers the flexibility of carrying forward their loyalty discount to a new property when they finance it with us.’
HSBC says there is also no lock-in period for its loyalty home loan packages, so customers are not tied down.
HSBC’s Sibor-pegged loyalty packages also come with a year-on-year decrease in the interest rates spread charged in the first three years, unlike conventional home loans, which typically see interest rate spread rise over the loan tenure.
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UOB’S HOMEPLUS:
Allows customers to earn the same interest rates on their deposits in a separate bank account.
Customers have the option of using the interest earned to offset their loan’s interest.
CITIBANK’S HOME SAVER:
Offers customers one of the widest selections of index tenures in the market, ranging from one month to three years.
With that, customers have the flexibility to switch from one tenure to another when the loan hits its maturity date.
HSBC:
Rewards customers by giving them a loyalty discount in the form of a year-on-year decrease in the interest rates charged.
There is also no lock-in period for its loyalty home loan packages, so customers are not tied down.
Breath of fresh air in home loans market
This is in sharp contrast to the backdrop that prevailed in the first quarter when amid gloom over the economic outlook and falling home price valuations, banks reportedly tightened lending criteria.
At that time, the spread on Sibor loans soared past 1.75 per cent depending on the loan-to-value ratio and whether the property is to be owner-occupied or for investment. For investment property, banks reportedly declined to offer financing higher than 70 per cent. Even for owner occupied home loans, 80 per cent was just about the maximum financing that banks would offer.
Now is a good time to secure fairly low interest rates, whether you’re in the market for a new loan or looking to re-price or refinance your current loan.
The three-month Sibor has been hovering at about 0.68 per cent for a few months, not far from the 10-year low of 0.56 per cent in 2003, based on Bloomberg data. The swap offer rate or SOR, which is used by banks such as OCBC stands at about 0.62 per cent.
Most observers do not expect interbank rates to trend up in the near term, particularly as the sustainability of the economic recovery remains in question. A UOB spokesman says: ‘Interest rates are anticipated to remain relatively flat at the current level in the months ahead. The trend for home loan rates will be dependent on market competition, cost-of-fund environment as well as global economic conditions.’
Based on rates obtained by Morgan Mortgage International, a mortgage consultancy, OCBC has some of the most attractive rates. Its variable rate package – home loans based on its ‘value rate’ or board rate – is quoted at 1.68 per cent for the first three years. While SOR loans with no lock-in are reportedly quoted at a spread of 1.25 per cent, those with a one-year lock-in charge an attractive spread of 0.85 per cent for the first year.
Fixed rate loans are also available with the first year rate quoted at below 2 per cent, for those who prefer certainty in their monthly payments.
Morgan’s Patrick Tan says that the firm has seen a 50 per cent increase in loan applications. ‘Refinancing activity is slowing down and making way for new loans . . . We believe we’ve reached the bottom in interest rates.’
The loan rates are supportive of an upturn in the property market, particularly as risk-free interest rates in terms of deposit rates and Singapore government bond rates remain low. A number of banks pay just 0.125 per cent for modest amounts. The yield on two-year SGS is quoted at 0.383 per cent, and five-year SGS at 1.34 per cent.
There are, of course, other factors that have buoyed sentiment, as reported in BT on Thursday. Pent-up demand is one factor, arising from the fact that current pricing is still below the 2007 peak. Yet another factor is a slowing of Housing & Development Board construction over the years.
Says Joseph Chong of New Independent: ‘The outlook is always uncertain, but it is less uncertain today than it was six months ago. We’re watching for policy errors like premature tightening. If there are no errors, the outlook is pretty good.
‘Right now, it’s not just rates that are low, but the availability of money is high. The asset cycle is turning and liquidity is plentiful.’
An OCBC spokesman says: ‘The housing market is currently very vigorous and we see great strength for new properties in the mass market. In the last few months, we’ve seen a lot of upgraders like young families entering the private property market.’
For now, it seems the bank sees little signs of froth. ‘We do not see great movements in the bigger priced properties, current movements are more or less limited to the mass market. We also do not see a great deal of speculation either as these transactions involve mostly owner-occupied homes.’
Source: Business Times, 8 Aug 2009
Couple sue over reverse mortgage
Damages sought from NTUC Income over alleged contract breach
REVERSE mortgages – launched with much fanfare over a decade ago to help retirees unlock the cash value of their homes – will, for the first time, be at the centre of an upcoming court case.
Mr Derek Chua, 72, and his wife Madam Colleen Ng, 57, have filed a suit against insurer NTUC Income after their reverse mortgage turned sour.
In the writ of summons obtained by The Straits Times, the couple claim that the reverse mortgage scheme entitled Mr Chua to live in the property until he died or sold the property.
They also claim that Income was not entitled to force them to repay the loan if the loan exceeded 80 per cent of their property’s market value.
When the reverse mortgage scheme was launched in 1997, it was seen by the Government as a way for the elderly to get some income from their homes without having to move out.
It offered an income stream for cash-poor but asset-rich retirees. They could use their homes as security for a loan that would be dispensed in monthly cash payouts.
Under the scheme, the lender would usually recover the cash it had paid out through the sale of the property after the borrowers had died. Any surplus would go to the estate.
Mr Chua and his wife signed up.
The property, which they bought in 1975, was valued at $2.1million in 1997. This allowed Income to lend them up to 80per cent of the valuation or about $1.68million.
Income also settled an outstanding overdraft of $495,000 that the couple had taken out from a bank using the house as collateral.
Income paid out $2,000 a month.
But things went wrong for the couple when property prices crashed after the Sars crisis in 2003. Their home’s valuation virtually halved to $1.1million in 2004 and they were told by Income that the loan was reaching its 80per cent limit. As a result, the couple’s monthly payouts were cut successively from $2,000 in 2004 to $300 by 2006.
In June 2006, the couple were told that their loan amount had exceeded 80per cent of their property’s market value at the time. The monthly payouts stopped the following month.
By then, the couple owed Income almost $1.05million – comprising the $495,000 to clear their overdraft, plus the monthly payouts and the compounded interest on these payouts.
It became necessary to sell the property to recover the sum.
According to the couple, Income found a buyer who paid $1.05million in November 2006, but there was still a shortfall of almost $55,000, which the couple were to pay off in monthly instalments over the next 10 years.
The couple started making these payments and kept them up until recently when they decided to take legal action.
Mr Chua, a retired flight engineer, and his wife, a housewife, who now rent an HDB flat, will be represented by Senior Counsel Michael Khoo. The appointment of a lawyer was made by the director of the Legal Aid Bureau, after the couple passed a means test.
Mr Khoo said the case was ‘the first of its kind’, and declined further comment as the suit has been filed.
In the writ, the couple are seeking damages for an alleged breach of contract to be assessed, and costs.
Both Income and OCBC Bank – the only other institution to offer reverse mortgages – stopped offering such loans last year as their take-up was not high. Income has issued 500 such loans since 1997 but only 134 remain active.
Property consultant Nicholas Mak, former head of research at Knight Frank, said it was not surprising that the scheme fizzled out as its success relied on ‘many factors, including the size of the market and its culture’.
A recent HDB initiative called the lease buyback scheme has broadly replaced the reverse mortgage, he said.
But this is available only to elderly folk who live in three-room or smaller flats. It monetises their flats to create annuities.
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NTUC: We have been more than reasonable
NTUC Income said it empathises with Mr Derek Chua and Madam Colleen Ng, but believes it has acted more than reasonably to assist them.
Income’s chief financial officer Jeffrey Lee told The Straits Times that before signing the deal, the couple were ‘advised by lawyers on all the terms and conditions of the reverse mortgage’.
Under a reverse mortgage, the maximum that Income would lend to a borrower is capped at 80 per cent of the prevailing value of the property. When the ratio reaches or exceeds 80 per cent, it indicates that the maximum loan limit has been reached and steps would have to be taken to recover the loan in accordance with the terms of the reverse mortgage.
During a review in 2004, Income found the ratio of the loan to the home’s valuation had exceeded the upper limit of 80 per cent, said Mr Lee.
Income’s managers met the couple to discuss their options, which included transferring the loan to another family member and renting out rooms for income. The borrowers considered, and elected to sell their property, he added.
Income also said it did not insist that the property be sold immediately, and it gave a grace period of more than two years. It also gave the couple a 10-year loan, at their request, to repay the shortfall, starting in July 2007.
‘NTUC Income has been more than reasonable in trying to assist the borrowers throughout the years,’ it said.
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Under the reverse mortgage scheme, the lender would usually recover the cash it had paid out through the sale of the property after the borrowers had died. Any surplus would go to the estate.
Source: Straits Times, 28 July 2009
Couple sue NTUC Income over reverse mortgage deal gone sour
(SINGAPORE) A couple are suing NTUC Income – in what is seen as a test case – over a reverse mortgage deal in which their property was sold amidst falling property prices.
Derek Chua, who is in his 70s and his wife Colleen Ng, who is in her late 50s, claim they lost their matrimonial home at Upper Serangoon in 2006.
NTUC Income demanded repayment of a loan procured in 1997 under a reverse mortgage, and the couple claim they had to sell their home to repay it, according to a writ of summons filed earlier this month and seen by BT.
The company’s chief financial officer Jeffrey Lee said in an emailed statement that NTUC Income had been ‘more than reasonable’ in trying to help the borrowers and that the couple had been advised on the terms of the deal.
The couple claimed that the 1997 reverse mortgage valued their house at $2.1 million, and based on a loan to valuation ratio of at most 80 per cent, they were given $495,000 cash to pay off their previous mortgage and payments of up to $2,000 a month.
In May 2004, the couple were told the value of their house had dropped to $1.1 million and they were in breach of the 80 per cent loan to valuation limit, based on the outstanding loan amount of $926,000.
According to the couple, they were told to top up $46,400 to bring the ratio down to the 80 per cent limit, and their monthly payments of $2,000 were reduced in steps to $1,500 from October that year.
A year later, in October 2005, NTUC Income said the outstanding loan, at $1.014 million, exceeded the 80 per cent limit based on the property value of $1.15 million. The couple were told they would get just $300 a month until June 2006, after which the company would ‘exercise (its) right to recall the property for auction sale’. The couple could also procure a buyer on their own or find another place to stay, according to a letter from NTUC Income, the couple said.
By then, the couple owed $1,045,802.91. On June 30, solicitors for NTUC Income sent the couple a letter demanding repayment or else face legal proceedings
The couple handed over possession of their property on Aug 31, according to their writ.
The property was later sold for just over $1 million, leaving an alleged shortfall of about $55,000, which the couple were asked to pay.
They claim that if not for NTUC Income’s letter, they would not have sold the property – which in 2008 was again sold for about $1.5 million, the writ says.
NTUC Income has yet to file its defence.
The couple have engaged senior counsel Michael Khoo through legal aid. NTUC Income is represented by Rodyk & Davidson.
Source: Business Times, 28 July 2009
HSBC offers new lure to keep home loan customers
HSBC is offering customers of its declining-rate-spread home loans who sell their houses a chance to continue benefiting from lower interest rate spreads, if they take out a new loan with the bank.
The latest tweak to its variable-rate mortgage offering is aimed at persuading customers to stay with the bank, even if they sell their home and redeem their existing loan.
HSBC charges customers of its Sibor-pegged home loans the three-month Singapore interbank offered rate or Sibor, plus an extra margin or spread that declines after the first year.
When the bank launched its Sibor-pegged ‘loyalty’ home loan package last July, the spread was 0.75 percentage points above Sibor in the first year, 0.65 points in the second year and 0.55 points subsequently. The current spreads are 1.3 points for the first year, 1.2 points for the second year and 1.1 points subsequently.
In March this year the bank launched a new ‘relationship-based’ home loan package that charged a spread that started at 1.5 percentage points above Sibor in the first year, then declined by 0.075 point each year until the 10th year, when the spread fell to zero, before rising again to 1.2 points subsequently.
Since then, the spreads have been revised. They now start at 1.2 points in the first year and fall by 0.1 point each year until they reach 0.8 point, where the level stays until the ninth year. The spread then falls to zero in the 10th year, and rises to 1.3 points subsequently. Sebastian Arcuri, head of personal financial services at HSBC, said the response to both packages has been ‘extremely positive’, with three-quarters of the bank’s home loan customers choosing one of the two, instead of fixed-rate loans.
With the latest ‘portability’ feature, customers who sells their home and redeem their mortgage early – say, in the third year – and takes out another Sibor-pegged home loan with HSBC for a new property will pay the same spreads as before on the redeemed loan amount, instead of starting at the top rate. If the Sibor rises significantly, however, the overall interest rate paid by a borrower may still increase from one year to the next.
Mr Arcuri said the feature will help customers save on interest. ‘With loan portability, our customers can enjoy the freedom and flexibility to redeem their loan, buy a new home and still benefit from a lower interest rate spread on their home loan year on year,’ he said.
To qualify for the rate-spread discounts and the portability feature, customers must keep at least $100,000 in deposits, investments or insurance with HSBC.
Source: Business Times, 22 July 2009
HSBC home loans offer ‘portability’ perk
HSBC borrowers with either the bank’s Singapore Interbank Offered Rate-pegged (Sibor) loyalty package or its Sibor-pegged relationship- based loan package will now not lose any of the time-related loyalty discounts they have earned when moving house.
The bank has launched a loan ‘portability’ feature for those with these packages. This allows them to carry forward the discount level they have reached to their new home. Customers can sell their property and continue from where they left off on the sliding interest rate spread offered to them under the two specific loan schemes.
For the relationship-based home loan package, HSBC customers see a year-on-year decrease in the interest spread until the 10th year, when it hits zero.
The Sibor-pegged loyalty home loan deal cuts the interest rate spread at the end of every anniversary year, up to the third year of the loan.
The two packages – both launched last year – are designed to reward longer-term borrowers.
Typically, loans pegged to the Sibor – the rate at which banks lend cash to one another – have either flat or increasing interest rate spreads.
Under the new arrangement, if a customer has a Sibor-pegged relationship-based loan and sells his property in the third year of the loan when the interest rate is 1.69 per cent – Sibor plus 1 per cent, assuming Sibor is 0.69 per cent – he can enjoy a first-year loan interest rate of 1.69 per cent on his new property.
From there, he can go on to enjoy the year-on-year decrease in interest rate spreads offered by his original Sibor-pegged deal with the bank.
Mr Sebastian Arcuri, HSBC’s head of personal financial services, said that loan portability meant customers can enjoy the flexibility to redeem their loan, buy a new home and still benefit from a lower interest rate spread year on year.
He added that for customers to enjoy this benefit, they must have a total balance of $100,000 and above in deposits, investments and insurance with HSBC. They must also finance their new home loan, on a completed property, within six months.
Source: Straits Times, 22 July 2009
Tips on refinancing your home loan
Your existing lender may give you a lower rate, but it may not be the best deal
With banks aggressively marketing their promotional packages, some home owners are looking into their current home loan interest rates and contemplating refinancing.
Refinancing refers to a situation where the property owners move from one mortgage loan package to another with the intention of (1) saving money by reducing interest rates; (2) restructuring the loan by including cash term loan or overdraft facilities; (3) moving to a different loan structure, such as from the conventional interest rate package to one that is linked to the interest rate of a current account.
However, do bear in mind that the low rates that are advertised may come with certain terms and conditions which may not suit your financial planning requirements. Here are some things to consider:
Flexibility: If you are planning to sell your property in the short term – say in one year or so – you may not want to get into a new package that locks you in for a period longer than you intend to keep the loan. If you do go ahead, be prepared to pay a lock-in penalty which is usually between 1per cent and 2 per cent of the loan amount as well as ‘claw back’ amounts.
The lock-in period is usually a percentage of the original or reducing loan amount. And claw back applies to the amount that must be returned to the lending bank should you terminate the loan. This usually includes legal subsidy, valuation, fire insurance or cash rebates.
Certainty: If you are currently in a fixed rate package where there is certainty and predictability, are you comfortable about moving to a variable package with volatility and uncertainty? Variable loan packages linked to the Singapore Interbank Offered Rate or the Swap Offer Rate are key products offered by most banks.
Before you sign into a seemingly attractive loan rate from a competing bank, check if your existing lender can offer you the same rates or terms that first drew your attention. Most lenders – once they know their borrowers wish to refinance – will be inclined to beat their competitors, particularly if the client is one with good financial standing and payment record.
For clients without fantastic payment records, it may be difficult to refinance as the new bank may not want to take them in. In such situations, there is more reason for the home owner to try to negotiate for better rates from his existing lender.
Advantages of staying with existing lender
To keep loans that they might otherwise lose, many lenders have loyalty programmes designed to recapture borrowers who are determined to refinance.
If you are currently in a lock-in period, it may be more advantageous to stay with your current bank and re-negotiate rates as moving to another bank may be costly. For instance, you have to incur a settlement cost with your existing lender before you move to a different bank and this may include a lock-in penalty and claw back amounts. Sometimes, the new lender may entice you by offering to pay the penalty subsidy, that is, absorbing all your present settlement cost.
But this often comes with conditions, such as longer lock-in periods, some up to seven years.
Moreover, if you are not looking to take any cash out of your home loan but only seeking to reduce the interest rate, the lender may elect simply to reduce the interest rate on your current loan rather than refinance. This avoids all settlement costs except for some charges required for changing the contract.
Disadvantages of re-pricing with your current lender
Most banks do expect their existing client to re-negotiate loan rates. As such, they have in place a standard ‘rate change package’. However, though the rate offered by such packages is usually lower than your existing rate, it is higher than current market rates offered to new customers.
For example, if the market loan rate is 2 per cent, the lender might offer you 3 per cent because your mortgage rate is currently 4 per cent. But a similar borrower moving to another bank may be offered 2 per cent.
In addition, you may not get the best service from your existing lender, since there is little incentive for the lender to close a deal at a lower mortgage rate than previously. This may not be deliberate but new loans are generally being signed faster than re-pricing loans. However, of late, most banks have set up a special re-pricing team and hence service levels for existing customers have improved.
Refinancing with the same bank is not cost-free either, as most would charge at least $500 to $800 to cover costs like the mortgage stamp fee.
On the flipside, most banks offer a legal subsidy to new customers who are refinancing. So as long as the refinancing results in net savings, the client will consider doing so.
Finally, do note that whether it is re-pricing with the current bank or refinancing with another bank, once you have signed the Letter of Offer, there is no turning back and the cancellation penalty kicks in if you change your mind.
Source: Straits Times, 19 July 2009
Don’t let your home loan haunt you
In picking a mortgage package, factors such as interest rates and lock-in period matter
For me, it was a 732 sq ft studio in Siglap that I bought in 2005.
When I paid the 1per cent deposit for the place, everything about it was perfect. It had an unblocked view of the East Coast, nice Italian marble flooring, a spacious kitchen (yes, single men do cook) and a huge balcony.
It had all the ingredients of a picture-perfect yuppie life.
I saw myself chilling out on lazy Saturday afternoons on the balcony, whipping up al dente pasta in the kitchen and taking cool evening walks by the beach, which was just around the corner.
So, like most Singaporeans, I emptied my CPF account, signed up for a home loan and, three months later, became the proud owner of my very own bachelor pad.
Buying my first home was a relatively painless and seamless process at the time.
All I did was put my John Hancock down on some papers – actually legal documents which I did not even bother reading – and there I was: a 20-something, first-time homeowner with a $250,000 mortgage.
Everything was cool until I received a letter from my bank just a couple of weeks before my first instalment payment was due.
It was my first mail at my new address and naturally I was ecstatic about opening it, but my fervour died when I read its contents.
The letter said something to the effect that because of fluctuations in the interest rate environment, my monthly instalments would have to be increased. In other words, I needed to pay more each month to service my home loan.
I was shocked. I had not even started unpacking my cartons of belongings and here was the bank telling me my monthly instalments had been raised.
That, however, is the reality that many often face when taking a home loan with variable interest rates, as I would later learn.
Buying a home is arguably one of the biggest financial commitments people will have in their lifetime, and a home loan is the heaviest debt they will have to pay if they take up a mortgage.
It baffles me now that I had actually signed up for a quarter-of-a-million dollar loan without carefully considering the conditions that were tied to it.
As the saying goes, the devil is in the details, and my sin was complacency. But what was an even bigger surprise was that many first-time homeowners were just like me.
I polled my peers and found that most of them also could not recall details like what interest rates their loans were on, how much their monthly instalments were, or even when their loan tenures would end.
Maybe we were just so preoccupied with the excitement of getting that dream home that we ignored the due diligence that should have gone into our hunt for the loan.
For me, the sheer number of banks that offered home loans and the various options available
certainly added to the confusion. But I recently found out – when I was buying my second home – that a little research can go a long way in avoiding nasty surprises.
So if interest rates are what really matters to homeowners, then it will probably be a relief for you to know that there are really only two main types of home loan in the market: loans with fixed interest rates, and loans with variable or floating interest rates.
With a fixed rate loan, you are somewhat protected from the fluctuations of interest rates, and typically you can expect to pay the same monthly instalment for at least the first few years of the loan tenure.
So if you want some sense of certainty that your monthly payments will always remain the same, go for a loan with fixed rates. But it is only really any good if you sign up for the loan when interest rates are low.
However, if you do sign up for a fixed rate loan, bear in mind that the annual fixed rate – which these days could go as low as 1.5per cent per year – usually ends after the initial one to three years, depending on your bank. After that, you will be charged the bank’s prevailing variable or floating rate, which for many is where the confusion and worries start.
Loans with variable or floating rates are of course the other alternative you could choose right from the start.
The interest rates of these loans are benchmarked against references like the Singapore Interbank Offered Rate or Sibor.
Sibor is the average interest rate at which banks borrow from one another. The key determinant of this is the United States Federal Reserve rate and overall liquidity, or availability of funds, in the banking sector.
Since the economic crisis broke, the Fed has so far managed to keep interest rates at 0.25per cent, a historical low. At the same time, Sibor has hovered at just around 0.7per cent in the last half year.
Industry observers say that because banks here are highly capitalised – meaning they have ample supplies of cold-hard cash – Sibor will likely remain low for now, unless the Fed rate suddenly spikes.
There is also another type of variable loan, one where interest rates are pegged to the Swap Offer Rate or SOR.
SOR essentially comprises Sibor plus the lending costs incurred by the banks, and is calculated over a period of time: usually three or six months.
For example, if your loan is based on a three-month SOR, your interest rate will be the three-month SOR plus a small margin for the bank, and that rate will be revised every three months.
Like Sibor, SOR is available to the public in newspapers and on the Internet. But SOR is also affected by the exchange rates of the US dollar versus the Singapore dollar, so it tends to be a little more volatile than Sibor.
Of course there are other factors to consider when signing up for a home loan. They include making sure you have the capacity to service the monthly payments, and are comfortable with the interest rates and lock-in period that come with the loan package.
Lock-in periods determine how long you are tied to the bank and allow it to penalise you if you decide to redeem your loan early.
So do not just get excited over what are now staple freebies such as legal fee subsidies, property insurance or even the free shopping vouchers that come with some home loan packages.
Getting the right home loan can mean more peace of mind and maybe even some savings in the long term.
Shop around for a loan that fits your needs instead and keep an eye on the details that really matter when signing up for one – whether it is a fixed or floating rate loan.
You really do not want to match your dream home with a nightmare of a home loan.
Source: Sunday Times, 12 July 2009
