UOB Launches Home Loan With An Overdraft Feature

Source : The Business Times, January 9, 2008

AMID the current negative interest rate environment, where inflation is rising faster than interest rates, United Overseas Bank (UOB) has launched a housing loan with an overdraft (OD) feature.

The OD facility gives customers the flexibility to invest, to reap potentially higher returns.

Kevin Lam, head of UOB's loans division, said he expects interest rates to remain stagnant for 2008. 'This year, I think interest rate will remain flat, with the general trend of softening, as we see some correlation with US interest rates,' he said.

The key three-month interbank rate stood at 1.81 per cent yesterday, after hovering between 2.4 and 3.4 per cent last year.

Inflation rate - as measured by the Consumer Price Index (CPI) - surged 4.2 per cent in November, compared with a year ago.

In this environment where asset prices are rising quickly and interest rates are low, consumers can capitalise on it by putting their money into other instruments or other uses, said Mr Lam. He added that asset inflation will probably remain for some time, and that asset prices will appreciate at a more modest level now, after having surged in the past few years.

The FlexiMortgage loan, launched recently, combines a conventional housing loan and an overdraft facility. Customers can decide on how much will go to paying the housing loan, and how much the OD will be.

For the housing loan component, the customer pays a normal monthly instalment, but for the OD component, customers service only the interest. The principal is not paid down in this component, and customers can decide when they want to pay the full sum of the principal.

The interest rate for this loan comes up higher than an average home loan interest rate, but Mr Lam said the bank is not competing on the basis of rates.

'We don't want to compete on interest rates since whatever rate you can come up with, a competitor will go lower,' he explained. 'We are moving away from that to redefine and create a new competitive advantage with this loan.'

In a typical home loan, wealth is locked in. 'If you want to take out your money, you must sell your place and downgrade your house for the extra cash,' said Mr Lam.

Another alternative is to go to the bank and take out an OD facility on the home. All that takes time and the legal processes can drag on for months, he explained.

However, with this loan, he said, the OD facility that comes with it can be used to tap business or investment opportunities quickly.

The OD facility currently has a floating rate of 4.25 per cent and follows UOB's prime rate of 5 per cent. If the prime rate moves up or down, the OD follows accordingly. The interest rate on the OD facility is comparable with those of other banks.

Mr Lam said he expects this loan to contribute 10-20 per cent to the bank's loan business this year. He said UOB did well last year in terms of market share and growth for loans.

UOB 'does not depend on deferred payment loans to grow its loan book', he said, dismissing perceptions that the bank has a large pipeline of deferred payment loans. 'Our business growth is in secondary market transactions,' said Mr Lam.