Adjustment Rate For Housing Loan Changed Unilaterally

Source : The Straits Times, Dec 14, 2007

CERTAIN banks in Singapore offer a feature on their home loans that allows you to deposit funds into a designated current account.

The funds in this account earn an adjustment that is pegged to the effective interest rates on the home loan. This adjustment will then offset the interest payable on the home loan.

I had just received a letter from Citibank that said that the adjustment rate had been changed from 100 per cent to 70 per cent for my loan. In the example given by Citibank for a $400,000 loan with a 30-year tenure, $100,000 in the current account and 4 per cent interest, the interest charges over the loan's tenure is increased by $38,728, simply as a result of this change.

Once a loan contract has been signed, there is nothing to stop Citibank (or any other bank) to even reduce the adjustment rate to zero, resulting in three times the interest increase.

This unilateral change in adjustment rate is an increase in effective interest on the loan, and it is done without changing the loan interest rates.

Is it fair for banks to offer adjustment rates as a 'feature' to woo customers but, six months into the loan, unilaterally reduce the benefits of the feature? Consumers are already locked into the loan without any recourse to redeem the loan or switch banks.

Eddie Tan Kian Wee