Maybank home loan deal may spark refinancing war

Maybank has fired the first salvo in what is likely to become the 2009 home loan refinancing war, as new property transactions slow down and banks try to poach one another’s customers to boost their mortgage books.

The bank yesterday announced a three-year fixed rate home loan refinancing package, throwing in free legal and valuation fees.

The interest rate for the first year starts at 1.6 per cent, rising to 2.2 per cent and 2.9 per cent for the second and third year respectively.

The catch is that the loan, which is also open to new home buyers, is available for up to only 70 per cent of valuation price. This is lower than current packages which offer financing for up to 80-90 per cent of valuation.

In addition, the package is only for lower risk owner-occupied and completed properties. There is also no minimum loan amount required for application.

With a fixed rate of 1.6 per cent per annum for the first year, Maybank’s refinancing package places itself as the lowest fixed-rate deal in town.

United Overseas Bank’s three-year fixed-rate package charges 3.25 per cent per year.

For borrowers looking at interbank plus packages, banks have jacked up their spreads as they turn risk averse. Sibor, the wholesale interbank rate, is hovering at just 0.68 per cent, taking it near the all-time low of 0.56 per cent in June 2003.

At DBS, a home buyer taking a Sibor package would have to pay the Sibor rate plus 1.75 percentage points.

A DBS spokeswoman said that the bank remains the only bank to date to offer full transparency for all home loans.

‘To offer customers peace of mind, the packages are pegged to publicly known rates like the interbank rates (offered under DBS Home Advice) and CPF Ordinary Account rate (offered under POSB Home Ideal),’ she said.

Maybank’s three-year fixed rate package works out to an average of 2.23 per cent per annum over three years, which is lower than the HDB concessionary rate of 2.6 per cent.

It said that refinancing customers also stand to enjoy fully subsidised legal and valuation fees if the loan amount is $400,000 and above for private properties, or $250,000 and above for HDB flats.

‘Prudent financing considerations should extend beyond short-term Sibor fluctuations,’ said Helen Neo, head of consumer banking at Maybank. ‘There is no guarantee that Sibor will keep trending downwards. We are confident that people will welcome the peace of mind that fixed rate packages can offer particularly in such times of volatility.’

Source : Business Times – 6 Mar 2009

To refinance or not to refinance?

We look at the various criteria you should consider before taking the plunge

WITH ever lower interbank rates, it would seem that refinancing your home loan is a good idea. You could save on loan servicing costs and avail of a number of incentives, including the absorption by banks of the penalty costs that you may incur.

But think again. The ongoing credit crunch has led banks to tighten their lending criteria as ‘overall lending conditions have changed’, says a banker who declines to be named.

In addition, softer property prices suggest that some borrowers may have to top up their home equity to be able to refinance their loans. This applies for property that was bought between 2007 and early 2008.

Even as the three-month Sibor rate continues to trend downwards – it is currently 0.69 per cent compared to 2.22 per cent in September – the spreads that the banks will charge above Sibor appear to be on the increase.

HSBC, for instance, which last September offered a margin spread against Sibor of 0.75 per cent, has raised the spread to 1.3 per cent. For home loans with no lock-in periods, some banks are charging an interest spread of as much as 1.75 per cent. A higher spread will compensate banks for risk as well as give them a better margin, even though deposit rates remain low.

Sibor isn’t the only benchmark that banks use. Some banks have chosen to use the three-month swap offer rate (SOR), which includes Sibor as a component. Hence, the SOR rate is higher than Sibor. The three month SOR is currently at 0.87 per cent, compared to 2.11 per cent in October.

Says Dennis Ng, who runs mortgage consultancy www.housingloanSG.com: ‘In general, risk has increased on a macro basis. Transaction volume of properties has gone down and there are retrenchments.’

Patrick Tan, director of Morgan Mortgage International, a mortgage consultancy set up last year, notes that some banks are applying a form of ‘risk-based’ pricing on their criteria, taking into account factors including applicants’ professions or jobs; the loan to value ratio; loan to income ratio as well as whether the property is an investment property or for owner occupation. Banks also tend to prefer a borrower to be employed, rather than self-employed, although the scale of expected job losses suggests that few jobs are secure.

DBS, for instance, has spelt out clearly on its website its rates for a number of permutations, depending on the loan to value quantum; whether the property is for owner occupation or investment; and whether the property is still under construction.

For instance, a borrower seeking a 90 per cent loan for an owner occupied property will pay Sibor plus 2.75 per cent for a completed property. For an investment property the spread rises to 3 per cent. The spread rises further to 3.5 per cent for an investment property that is still under construction.

Mr Ng believes refinancing should not be a problem for those with a strong credit profile. House price valuation, however, is another issue. ‘There are instances where we check with banks and everything seems ok, and a month later the valuation has changed. Even though we had pre-approval, the bank will still adjust the valuation.’

Clients who had bought their properties earlier may not have to make any home equity top-ups. ‘Prices went up 100 to 200 per cent in the last four to five years. If you bought your property more than two years ago, the current value should still be higher.’

Morgan’s Mr Tan believes Sibor and SOR rates could stay low for the near term, but the spreads that customers must pay are trending up. ‘Those who are out of any lock-in period should consider refinancing before they miss the opportunity.’

Some clients, however, still prefer the peace of mind that comes from a fixed rate. So far, among the packages surveyed by Morgan, one of the most attractive appears to be that offered by Standard Chartered Bank, where the first year fixed rate is 2.18 per cent, followed by 2.49 per cent in the second year.

Recognising that some clients prefer visibility in their mortgage payments, UOB has a package, dubbed ‘Clear’, where the monthly instalment is fixed for three years, even though the interest rate is pegged to the SOR. If the SOR falls, any excess payment goes towards servicing principal. If the SOR rises to the extent that the interest on the outstanding balance exceeds the monthly instalment, the customer will have to pay the difference.

As refinancing involves switching banks, borrowers will typically be charged a penalty of 1.5 per cent of the loan amount as a full redemption penalty by their existing bank. Mr Tan says some banks will absorb this cost, subject to a clawback if the borrower switches banks again within the lock-in period.

Meanwhile, if you are keen to explore refinancing your loan, consider the services of a mortgage broker, who can compile rates, costs and benefits for you. Most banks are open to dealing with brokers, although one bank has set criteria that brokers need to meet to be on its panel of agents.

The fee paid to brokers or property agents – who also refer clients to banks – is said to be competitive. Mr Ng says: ‘We try to match clients with the banks. Some banks are very strict on the loan to income ratio. Some banks may look at whether the client holds other assets and relationships with institutions . . . We help clients to find an institution that will welcome them.’ While banks generally deem a 50 per cent loan to income ratio as acceptable, a more prudent ratio is 30 per cent, he adds.

While loan applications for new property purchases have plunged along with a moribund property market, most of the volume has so far been driven by refinancing. Demand for the latter, however, may also soften going forward.

Mr Ng says: ‘Refinancing may become difficult. Recently we had some cases where we advised them to stick with the same bank even though it didn’t give them the best rates. If they switched banks, they would have to come up with cash for a top-up as the current valuation is 10 per cent lower. We’re starting to see some of these cases. Others should be able to refinance – as long as they keep their jobs.’

Source : Business Times – 7 Feb 2009

Property sector needs govt help in refinancing $12b of debt

THE Government has been asked to help listed property firms here, especially real estate investment trusts (Reits), to refinance an estimated $12 billion in debt, given the frozen state of credit markets.

The appeal comes from the Singapore-based Asian Public Real Estate Association (Aprea), a body set up to represent the listed real estate sector in Asia.

‘Government assistance is needed to get liquidity moving and reduce the risk of plummeting real estate values and pressure on the capital positions of lenders,’ said a background paper by Aprea. ‘Its help is needed to restart the credit markets for commercial real estate debt.’

‘This is an issue for the general commercial real estate market and, by extension, the broader real estate market and the broader economy,’ said its chief executive Peter Mitchell yesterday.

Aprea has been submitting a series of proposals since last November to regulators in Singapore and Japan, seeking assistance in these unusual times, he said.

One assistance option would be a lending facility being implemented in Australia, said Aprea. The country announced a A$4 billion (S$3.86 billion) fund with four Australian banks to support lending in the commercial property sector.

The Singapore Government has unveiled measures to free credit to businesses here but nothing specifically aimed at listed real estate entities.

Inability to raise credit and refinance could lead to foreclosures, bankruptcies and forced sales, leading to market instability and a potential downward spiral, the paper said. ‘The more that real estate loans can’t get refinanced, the more risk there will be of losses for the banks, some of which can ill afford more losses.

‘Banks’ jobs are to make loans, not own real estate. There is a risk that banks will not be able to absorb, manage and turn around properties at this scale if they come back to the lenders,’ it said.

‘The collapse of an otherwise healthy real estate market caused by general credit paralysis has the potential to significantly aggravate recessionary pressures.’

There is a risk of default being forced upon property owners that hold property with good cashflows, a risk that would not exist in a normally functioning credit market, it said.

The current negligible activity in commercial real estate market is a particular issue for Reits, which the paper described as a ‘handle with care’ product.

Ratings agencies are talking about downgrading Singapore Reits because of refinancing concerns. But it is because of the dysfunctional credit environment and should not happen, said Mr Mitchell.

‘It is not the Reits themselves having problems. They are just being impacted by the freezing of credit.’

Of the estimated $12 billion of refinancing needs this year, one-third is attributed to Reits. It is important to help Reits through the turmoil as they are what will attract investors as Singapore moves out of this downturn, he said.

‘Investors are going to be risk-averse and will look for things that are liquid, transparent and lowly geared, equity-oriented
investment. That’s what Reits are.’

Source : Straits Times – 5 Feb 2009

Group asks for govt’s help in refinancing S$4b REIT debt due in 2009

A group representing Asian property investors and developers has asked the Singapore government to step in, if necessary, to help real estate investment trusts (REITs) to refinance an estimated S$4 billion in debt due this year.

The Asia Pacific Real Estate Association (APREA) has written a background paper on the issue. It said that real estate is a capital-intensive business, but at present there is effectively no capital.

The group said that government assistance is needed to help restart the credit markets for commercial real estate mortgages.

The association’s chief executive, Peter Mitchell, cited moves taken by other governments such as Australia’s recent decision to create a US$2.6 billion crisis fund to support lending in the commercial property sector.

The association estimates that Singapore-listed property firms, including REITs, have about S$12 billion in loans and bonds that will become due before the end of this year.

The group’s other proposals to help Singapore-listed REITs include allowing a temporary tax waiver on undistributed earnings to help them conserve cash and for the central bank to accept real estate loans as collateral in repurchase agreements with banks.

Source : Channel NewsAsia – 4 Feb 2009

Lobby group says Singapore Reits need help with debt

A group representing Asian property investors and developers has asked the Singapore government to step in if necessary to help the city-state’s real estate investment trusts (Reits) refinance an estimated S$4 billion in debt due this year.

‘Real estate is a capital-intensive business but at present there is effectively no capital,’ the Asian Pacific Real Estate Association (APREA) said in a background paper seen by Reuters on Wednesday.

‘Government assistance is needed to help restart the credit markets for commercial real estate mortgages.’

Peter Mitchell, the association’s chief executive, told Reuters that APREA has submitted several papers asking Singapore authorities to consider direct steps to help Reits and property firms roll over maturing loans and bonds to inject confidence into the market.

Many companies worldwide have had difficulty getting new loans and refinancing existing debt as the global credit crisis makes lenders more wary about taking on risk. At the same time, the global economic downturn is clouding the business outlook, eroding corporate revenues and reducing the value of assets such as property, putting even more pressure on firms such as developers and Reits.

Mr Mitchell cited moves taken by other governments such as Australia’s recent decision to create an A$4 billion (US$2.58 billion) crisis fund to support lending in the commercial property sector.

The association estimates Singapore-listed property firms including Reits have about S$12 billion (US$7.96 billion) in loans and bonds that will become due before the end of this year.

The group’s other proposals to help Singapore-listed Reits include allowing a temporary tax waiver on undistributed earnings to help them conserve cash, and for the central bank to accept real estate loans as collateral in repurchase agreements with banks.

Singapore Reits tend to pay out 100 per cent of their net income as retained earnings which are subject to tax, leaving them with little buffer in turbulent times.

APREA is a Singapore-based lobby group whose 120-plus members include sovereign wealth funds such as Abu Dhabi Investment Authority and Singapore’s GIC Real Estate as well as private firms such as Australia’s AMP Capital and the Philippines’ Ayala Land.

Source : Business Times – 4 Feb 2009

Distressed-debt managers look to developers

Asian distressed-debt managers expect real estate developers and companies in China, Indonesia and Australia to provide them with the most investment opportunities next year, an industry survey shows.

Economic recession, slowing consumer spending and shrinking bank lending indicate that a growing number of Asia- Pacific companies will face difficulty in refinancing debt next year, according to a survey of 100 hedge fund managers and proprietary trading bankers published by Debtwire yesterday.

‘This will be a prolonged process of unwinding the 25-year bull market,’ Singapore-based Robert Schmitz, head of restructuring for Asia with NM Rothschild & Sons Ltd, said in the report. ‘We have to be mindful that the bear market that started over a year ago could last about one-quarter to one-third the duration’ of the bull market.

The debt refinancing risk for Asia-Pacific companies is becoming a ‘growing concern’ as the global credit crisis worsens, Standard & Poor’s (S&P) said on Tuesday. The region’s companies have US$368 billion of rated debt maturing from the fourth quarter of this year to the end of 2011, led by Japan and Australia, S&P said. That includes US$113.9 billion due next year and US$10.9 billion owed by real estate companies.

Ninety-two per cent of survey respondents said that they expect increased financial stress among Asian property companies next year, while 76 per cent expect more distress among financial companies, and 75 per cent among industrial and chemicals companies, the report shows. Telecommunications companies and utilities are expected to have the smallest rise in distressed debt.

More than half of the respondents said that rising defaults will emerge in India in the next two years, while about a third forecast increasing corporate distress in South Korea as Asia’s fourth-largest economy wrestles with a falling currency and difficulty borrowing overseas.

‘Going into their downturn, Korea looks like Detroit in the 1970s but without the good music,’ Scott Bache, Hong Kong-based partner for Clifford Chance LLP, said in the report.

Real estate developers account for nine out of 13 Chinese borrowers that are financially stressed, and owe half the companies’ US$16 billion in combined debt, according to the report. In Japan, 14 of 25 companies in default are developers; while in Australia, US$14.5 billion of a total US$32.5 billion in stressed and defaulted debt is related to real estate.

‘The predictability of the Australian legal system allows investors to enter into distressed situations with some degree of comfort that they will not be blind-sided,’ said Mr Bache. ‘China and Indonesia, on the other hand, will be driven as much by the relationships investors have with the key stakeholders and the politics of any given situation than a respect for creditors’ legal rights.’

Distressed-debt managers typically seek to profit by buying assets at below their face value, providing high-yield financing that could give rights to equity and opportunities to restructure companies before selling them at a higher value.

Source : Business Times – 5 Dec 2008

Asian developers offer biggest opportunities

ASIAN debt managers expect real estate developers and companies in China, South Korea and Australia to provide them with the most investment opportunities next year, an industry survey shows.

Economic recession, slowing consumer spending and shrinking bank lending indicate a growing number of Asia-Pacific companies will face difficulty refinancing debt next year, according to a survey of 100 hedge fund managers and proprietary trading bankers published by Debtwire yesterday.

“This will be a prolonged process of unwinding the 25-year bull market,” Singapore-based Robert Schmitz, head of restructuring for Asia with N M Rothschild & Sons, said in the report. “We have to be mindful that the bear market that started over a year ago could last about one-quarter to one-third the duration” of the bull market.

The debt refinancing risk for Asia-Pacific companies is becoming a “growing concern” as the global credit crisis worsens, Standard & Poor’s (S&P) said on Dec 2.

The region’s companies have US$368 billion ($562 billion) of rated debt maturing from the fourth quarter of this year to the end of 2011, led by Japan and Australia, S&P said. That includes US$113.9 billion due next year and US$10.9 billion owed by real estate companies.

Ninety-two per cent of survey respondents said they expect increased financial stress among Asian property companies next year, while 76 per cent expect more distress among financial companies and75 per cent among industrial and chemicals companies, the report shows.

Telecommunications companies and utilities are expected to have the smallest rise in distressed debt.

More than half of respondents said rising defaults will emerge in India in the next two years, while about a third forecast increasing corporate distress in South Korea as Asia’s fourth-largest economy wrestles with a falling currency and difficulty borrowing overseas.

“Going into their downturn, Korea looks like Detroit in the ’70s but without the good music,” Mr Scott Bache, Hong Kong-based partner for Clifford Chance LLP, said in the report.

Real estate developers account for nine out of 13 Chinese borrowers that are financially stressed, and owe half the companies’ US$16 billion in combined debt, according to the report.

In Japan, 14 of 25 companies in default are developers, while in Australia, US$14.5 billion of a total US$32.5 billion in stressed and defaulted debt is related to real estate.

Source : Today – 5 Dec 2008

Call to make refinancing of debt easier for S-Reits

ARA CEO John Lim suggests regulatory reviews to relax bank lending to S-Reits for the next few years to tide them over liquidity issues

ARA Asset Management Group CEO John Lim would like to see refinancing of debt being made easier for Singapore real estate investment trusts (Reits). ‘The whole S-Reit market is oversold. The biggest fear, besides the issue of valuation of assets, is the refinancing of debt,’ he told BT in a recent interview. ‘In 2009 alone, you have $4.6 billion of debt for refinancing. In the next four years, it may be close to $20 billion including rollover debt. The issue is very real.’

Mr Lim made a few suggestions involving a regulatory review to relax bank lending to S-Reits for the next few years to tide them over liquidity issues.

One suggestion would be for the Monetary Authority of Singapore to consider lifting the cap limiting banks’ exposure to property development and investment activity – excluding owner-occupied residential mortgages – to 35 per cent of total non-bank loan and credit exposures, under Section 35 of The Banking Act.

‘But if that is not possible, why don’t they consider exempting Reits from Section 35 for Singapore banks?’ Mr Lim asked. Arguing the case for this, he said risks are relatively low for S-Reits, which are generally conservatively geared at between 30 and 40 per cent, while those geared above 35 per cent have to be rated, so the risk is reflected in the rating. ‘As a quid pro quo (for exempting S-Reits from the Section 35 limits), Reits may have to accept a lower gearing limit,’ he suggested. ‘So we would not be putting any additional risk on to the banking sector.’

Under current rules, a Reit’s aggregate leverage limit is 35 per cent of its deposited property if the Reit is not rated, with a higher 60 per cent limit if a credit rating for the Reit is obtained and made public.

Last month, Monetary Authority of Singapore deputy chairman Lim Hng Kiang told Parliament that most banks are significantly below the Section 35 limit and the aggregate banking system’s exposure here is just 15 per cent.

A banking source said that although most banks may be well below the Section 35 limit, they may be prudent and set their own internal limits that may be below that stipulated by MAS.

ARA’s Mr Lim has another suggestion on his wish-list to alleviate refinancing issues for S-Reits: Perhaps MAS could set up a temporary relief fund line of, say, $10 billion – managed by the banks – to provide refinancing to S-Reits in the next few years.

He stresses that he is not making his various suggestions for the benefit of the Reits managed by ARA, such as Fortune and Suntec Reits, but out of concern about the fate that may befall smaller Reits without strong sponsors if they fail to secure refinancing deals. ‘We don’t want to see even a single Reit fail,’ he said. ‘Because when even a small Reit fails, in today’s market, confidence in the whole S-Reit sector will collapse. It would be the same phenomenon as Lehman Brothers.’

If Reits cannot refinance their debt, they may be forced to sell assets on the cheap in a weak property market to repay their loans or do a rights issue at a huge discount that could potentially cause earnings dilution. ‘Either way, that is going to destroy value,’ said Mr Lim

Privatisation is another possibility Mr Lim envisages, given that S-Reits are trading at huge discounts to net asset value (NAV) – on a sector average basis, at over 50 per cent. Market watchers suggest that a way out for weaker Reits with refinancing issues could be to issue new shares to new cornerstone investors who may come on board with an eye on taking the Reit private later.

Giving his take, Mr Lim said: ‘If you’re trading at 80 per cent discount to NAV, or 50 or 60 per cent discount and you have a good bunch of assets, privatisation is definitely a viable (exit) option for shareholders, although it may not be fair value for long-term investors.’

Once a Reit is privatised, it would become a privately held property fund, and this would reduce the number of S-Reits trading on the Singapore Exchange. ‘So privatisation won’t be good for the Reit industry because you have fewer Reits,’ Mr Lim said. Market watchers say another big worry for S-Reits is that they are staring at write-downs on the value of their properties.

Lowering the value of properties would raise their gearing ratios – borrowings to value of property – and create challenges for Reit managers. They may have to resort to selling assets to repay borrowings or recapitalising by issuing new units and using the equity raised to trim debt. But this would have to be at discounts to market price to lure investors, and the additional units could dilute earnings.

Mr Lim acknowledges his suggestions on reviewing regulatory limits on property sector lending by banks won’t be a panacea for problems facing the S-Reit industry ‘but at least you give more avenues available for the industry so the chances of the worst scenario happening are less’.

ARA Asset Management, the only property fund management outfit listed on the Singapore Exchange (SGX), was set up by Mr Lim and Cheung Kong Holdings in 2002 and floated in November last year. Today it has $12 billion of assets under management. Mr Lim owns about 36 per cent of ARA. He lamented that ARA, a publicly listed property fund manager that manages six funds, is trading at six times price-earnings ratio, while recent deals involving unlisted managers of single Reits have been at a much higher 15 to 20 times. ARA manages four Reits – Suntec and Fortune listed on SGX, Prosperity Reit in Hong Kong and AmFirst listed on Bursa Malaysia – and two private property funds. The two private funds are ARA Asia Dragon Fund, which counts Calpers as anchor investor, and ARA Asian Asset Income Fund, a smaller fixed-income fund that invests in Reits, listed infrastructure and utilities trusts in Asia.

Mr Lim, 52, has more than 27 years’ experience in the real estate business, of which 13 have been in the property fund management industry. The avid 12-handicap golfer is an engineer by training. His first job was with the former DBS Land, where he worked for nine years. He later joined Singapore Labour Foundation Management Services, where he was general manager. He was also executive director at GRA (Singapore), today known as Pramerica Real Estate Investors (Asia). Mr Lim also sits on the Finance Ministry’s Valuation Review Board.

Source : Business Times – 15 Nov 2008

Finding the best way to pay off a home loan

When the going gets tough, the tough go shopping. And that is what home owners have been doing – shopping for suitable and the lowest home loan rates.

The cheap cost of borrowing, a result of interest rates heading south, has led to more home owners opting to refinance their mortgages to enjoy savings.

Fuelling this trend are financial institutions which are jumping on the bandwagon to launch attractive and creative loan packages to capture a bigger slice of the lucrative mortgage market.

Refinancing your home loans

Let’s take a look at the refinancing trend so far this year. Mortgage consultancy portal www.HousingLoanSG.com has seen a surge of at least 50 per cent in refinancing activities.

At HSBC, the volume of refinancing applications has grown more than 50 per cent in the last three months.

‘The reason for this trend is the big drop in the Singapore Interbank Offered Rate (Sibor) in the last 18 months from as high as 3.5 per cent to about 1.2 per cent currently,’ said Mr Dennis Ng, spokesman for www.HousingLoanSG.com.

Sibor is the benchmark rate used by banks to determine mortgage rates for home loans. It is the cost at which banks borrow funds from one another.

The drop in Sibor means that those who took up a housing loan one to two years ago are likely to enjoy significant interest savings if they refinance now.

Mr Ng worked out that refinancing an outstanding loan amount of $480,000 to a lower interest rate of 1.95 per cent, down from the current rate of 3.5 per cent, will result in interest savings of $21,710 over three years. This assumes a 25-year loan tenure.

Even those who are subject to lock-in and clawback penalties may save money by refinancing, said Ms Annie Lim, managing director of mortgage consultancy Global Creatif Financial.

Furthermore, financial institutions which are eager for your business may offer to pay your legal fees of up to $2,000 for you to switch banks.

Refinancing has represented 75 per cent of all mortgages at Global Creatif Financial so far this year.

Still, Ms Helen Neo, Maybank Singapore’s head of consumer banking, cautions that refinancing should be considered only when there are no plans to sell the property in the short term so as to avoid paperwork and potential costs.

Pegged rates versus fixed rates

With Sibor falling steadily, it is not surprising that many customers are opting for new Sibor-linked packages or refinancing from a fixed-rate package to a Sibor one.

Still, some customers are confused when faced with a choice of a three-month or a 12-month Sibor-pegged home loan package.

Mr Ng noted that if one chooses the latter, it is as good as fixing the interest rate for a year.

This means the customer enjoys greater certainty or lower volatility with a 12-month Sibor package than a three-month package.

However, as the 12-month Sibor rate is typically 0.5 per cent higher than the three-month Sibor, he will end up paying a higher interest.

Ms Lim believes that the three-month Sibor will appeal to those who are comfortable with the current interest-rate environment and who expect rates to stay depressed.

Looking ahead, Mr Bryan Ong of mortgage consultancy bcgroup.com.sg thinks that rates will remain flat for the next 18 months. That is why he feels that the three-month Sibor is ‘the way to go’.

New home loan packages

With depressed interest rates and an influx of new and creative home loan packages, home owners are spoilt for choice.

However, opting for the cheapest rates may not always be the best for every home owner, as different people have different needs.

MortgageOne Sibor

For instance, Standard Chartered Bank’s (Stanchart) newly launched MortgageOne Sibor will appeal to those with excess cash.This is because it comes with an offset feature so that customers can  use the interest earned on their deposits to reduce the interest payable on their home loans.

MortgageOne Sibor loans are priced at 0.8 per cent per annum above the three-month Sibor for the first three years.

Customers can enjoy the same interest rate as their mortgage loan on two-thirds of the deposits linked to their loans, subject to a maximum of their outstanding loan amount. The remaining deposits will enjoy an annual rate of 0.5 per cent.

At the same time, they have the flexibility to withdraw their deposits at any time.

‘This is good for home owners who have surplus cash. They could be waiting for investment opportunities and want to remain liquid. In the meantime, they can use their cash to reduce their loans,’ said Mr Ong.

Interest-only loans

Some mortgage packages like the DBS Bank’s new interest-only mortgage product launched early this month appear attractive, but experts cautioned that they are not suitable for everyone.

The product allows customers to pay only the interest for the entire duration of their home loan.

The principal amount is payable in one lump sum only at the end of the loan tenure.

This means that the money that would otherwise have formed the principal component of the loan instalments would be available to the customer for investing.

Ms Lim worked out that based on a rate of 3 per cent, a $1 million loan with a 25-year tenure would have a monthly instalment of $4,486.

Of this, $2,083 is paid towards the principal and would thus be available to the customer to meet other needs if he opts for interest-only servicing.

But here’s the potential pitfall. If the customer invests wrongly or, worse still, has no discipline to save and invest, the amount would be frittered away and he still has a loan to pay.

Ms Lim said that she would go for an interest-only loan only under the following situations:

~ If she has an intention to buy multiple properties and would like to pay only the loan interest and keep every cent possible;
~ If she has other alternatives to invest at higher returns; or
~ If her cashflow is very tight.Like her, most experts said that they would prefer the conventional packages where both principal and interest are paid up regularly and doing so helps them pay their home loans in a disciplined manner.

Said Mr Ng: ‘The customer might end up in financial trouble in the event that property prices correct by say over 20 per cent and plunge him into negative equity.

‘In such a situation, he might not be able to sell his property at a price where he can pay up the loan.’

He cautioned home owners who opt for such a product that they would end up paying more interest in the long run compared to conventional loan packages where both the interest and principal components are paid up regularly.

However, Mr Ng added that he might consider such a loan package if he is buying an investment property.

DBS’ interest-only mortgage charges 1.5 per cent on top of either the three-month or 12-month Sibor.

Other banks like Stanchart allow customers to pay only interest on a mortgage for up to three years and such products are offered on a case-by-case basis.

To ensure that customers are not overstretched, DBS imposes certain restrictions such as allowing home owners to borrow only up to 70 per cent of the property purchase price.

Finally, Stanchart’s general manager of lending, Mr Dennis Khoo, advises home owners to consider the following when choosing a mortgage package:

~ Is the property for your own stay or for investment?
~ What are your long-term financial goals?
~ Do you prefer security and protection or transparency with some volatility?
~ Do you have any spare cash that you can use to reduce your interest payments and shorten your loan tenure?

A word of caution

‘The customer might end up in financial trouble in the event that property prices correct by say over 20 per cent and plunge him into negative equity. In such a situation, he might not be able to sell his property at a price where he can pay up the loan.’ – MR DENNIS NG, spokesman for www.HousingLoanSG.com, on the dangers of taking up an interest-only loan

Source : Sunday Times – 24 Aug 2008

Email lushhome@gmail.com to speak to professional loan consultants.

Home rates going back to 2003 levels? Not quite

Falling interbank rates won’t automatically mean a throwback to the past

SINGAPORE interbank rates – the prices banks charge each other for short-term funds – are threatening to fall back to record lows.

The benchmark three- month rates are now nearing one per cent, down from around 3.5 per cent a year ago and threatening to ease to the record levels around 0.5 per cent in early 2003. Naturally, it should be good news for homeowners as they expect to see their borrowing costs return to the low levels of 2003, when banks were dishing out loans at 50 basis points and below.

Is this on the cards again? Well, it depends on who you talk to. If you call your local bankers, they are likely to tell you that the domestic and global credit situations are quite different from the Sars days when banks had to fight for their home business.

Foreign banks were relying more on the interbank market for their retail funding and when interbank rates fell to near zero, they were able to price their home loans at well below one per cent. Some of the foreign banks had also just gotten their Qualifying Full Bank licences then and were using their home loan platform and price cutting to jump-start their consumer business. Today, they have been allowed to build a wider retail network of branches and ATMs and they depend more on the retail deposits to fund their home loans.

As such, they are not able to use the undercutting strategy too aggressively, having built up some expensive retail deposits. Maybank, for instance, launched a 1.58 per cent package which was limited to a short promotion period. Given the costs of running the retail branches and the limit that deposit rates can be cut, pricing for home loans is also not given much leeway downwards, local bankers argue.

Also, the banks are more disciplined now with their credit pricing, given the global credit crunch and the sub-prime-related problems in the US. Because of their overall tighter credit policy, it is no longer easy for them to build their business based on an underpricing strategy with risks in property loans having gone up worldwide. In the last quarter, banks such as HSBC and Citigroup continued to write off sub-prime and other real estate-related portfolios at alarming levels.

In fact, many bankers reckoned interest rates after the recent spate of cuts may be headed upwards. ‘Given that the sub-prime crisis and the subsequent credit turmoil has not abated with the financial markets remaining volatile, the outlook for interest rates is still uncertain at this point in time with upside bias as the longer-term interbank rates have been on the uptrend over the past one month,’ said Gregory Chan, head of secured lending, OCBC Bank.

Perhaps the biggest difficulty for the consumer has been the expensive refinancing costs. Banks well aware of the possibility of refinancing in a downward trend market have been clever to price in the higher penalty costs should consumers make their switch. For instance, those who borrowed at around 3.2 per cent last year would have to factor in a 1.5 per cent prepayment charge, repayment of legal subsidies and other administrative charges which may work out to well over 2 per cent of total loan size, making it difficult for them to refinance. As such, some of the banks have actually enjoyed some widening in margins as their deposit rates fell while their home loan rates have not been adjusted down as much.

‘Banks still have to make a margin. People forget that at 2-3 per cent, it is historically still very low for home loans, compared to the days of near 10 per cent after the 1997 crisis,’ said one banker. The bottom appears to hold around 1.6-1.7 per cent for the first year for the time being but with heavy prepayment penalties priced in.

In any case, observers noted – unlike the sluggish credit market of 2002 – Singapore, underpinned by projects such as the integrated resorts and ongoing massive private and public building, is undergoing quite a boom on the corporate front. Local banks have been able to repark their surplus funds elsewhere in better-yielding corporate loans and papers instead of the falling interbank market.

Building and construction loans continued to absorb some of the surplus funds. Bankers reported the spreads in Asia for good corporates have widened by 100 basis points or more in the last few months and Asian borrowers long spoilt by the massive liquidity are now finally paying the right price for loans.

In fact, some developers suspect the banks are nearing their regulatory limit themselves for property-related loans with the two casinos and the ongoing condo building sucking up much liquidity. Smaller developers are even being avoided or squeezed with some getting quoted up to even 400 basis points above interbank.

Banking analysts, however, present a slightly different picture.

One foreign analyst reckoned foreign banks have not pulled their punches and didn’t believe that they have been tied down by other global credit issues.

‘Asia has never been more important to the foreigners and they will remain very active in the region,’ he argued, adding that mortgage demand seemed to have dried up and most of the activity is now refinancing. He figured the foreign banks have actually won market share from the local banks, seen from Q1 results.

The other change is the emergence of interbank- pegged home packages. One analyst said these are becoming increasing popular and the fall in the interbank market would automatically adjust some of these home rates. But he conceded tighter credit controls and a more disciplined approach will mean – all else being equal – that rates will fall less than they would have in the past when Sibor fell.

Also, the looming global slowdown and property downturn could mean banks may have to drop rates again, analysts say.

One thing is for sure: if rates were really to fall back to the levels of 2003, analysts and bankers reckon it would also mean that while you may save on borrowing costs, you would probably have another property recession and negative equity at hand.

By QUAK HIANG WHAI, freelance writer

Source : Business Times – 20 May 2008