Penalty On The House As Banks Woo Customers

Source : The Business Times, April 17, 2008

Some are repricing home loans lower, others offer to subsidise penalties

As home sales continue to slide, banks are going all out to hang on to their existing home loan borrowers and even poach from their rivals. Some are even offering to pay off the penalties that customers may incur making the switch.

Flexibility has become a byword and new packages are getting more imaginative.

In anticipation of interest rates falling even further, one new DBS home loan package offers two free repricings within 24 months.

At United Overseas Bank (UOB), customers can fix the monthly payments for 36 months regardless of interest rate changes.

At Standard Chartered Bank, borrowers don't even have to call. The UK-based bank has begun repricing home loans downwards for existing customers on variable rate packages.

It is understood to be the first bank to do so given the steep falls in interest rates since last December.

The last time banks were proactive in repricing home loans was in 2005 after interest rates rose sharply in the third quarter of 2004.

This, in turn, led to several rounds of hikes as the period followed two years of record lows when interest rates went below one per cent.

Stanchart's automatic repricing is for customers who are out of their lock-in periods, that is those who do not have to pay a penalty if they repay the loan in full.

'Our customers were notified late last month,' said Dennis Khoo, Stanchart general manager, lending.

'We proactively look at the customer base and take the necessary steps to ensure the pricing is competitive; if not, the competition will take them,' said Mr Khoo.

The repricing can take the form of a new package or a lower rate within the existing contract, he said.

For banks looking to grow their mortgage business in a sluggish property market, refinancing or winning over customers from rivals is critical.

In the first quarter, only 795 new private homes were sold, about half the 1,469 units in the preceding quarter.

'Refinancing business is something all the banks do and in a market situation like this, they have to work harder,' said Kevin Lam, UOB head of loans.

At the same time, efforts to retain customers have gone into overdrive.

'All banks have a dedicated team to retain customers,' said Mr Lam.

Repricing though can be a tricky business for borrowers still within their penalty periods because their banks have yet to recover their original costs of selling those loans.

So banks know that one way to poach customers from rivals is by offering to pay the penalty rate which can be hefty - typically 1-1.5 per cent of the outstanding loan.

'It's difficult because they were heavily subsidised in the first year. It's on a case-by-case basis, it depends on the total relationship as the bank may have to stomach the loss,' said Mr Khoo.

Koh Kar Siong, DBS managing director and head of secured loans, said customers who are considering refinancing need to assess the interest savings and the costs incurred such as legal fees and any penalties or subsidies payable to the financier.

'To help customers with the upfront costs, we do have customised packages that offer penalty subsidies,' said Mr Koh.

One Stanchart customer said she decided to refinance with DBS Bank after the latter offered to subsidise the penalty fee running into $20,000 plus.

'DBS calls it 1.00 per cent penalty subsidy and there is a 36 months pro-rated clawback,' said the customer.

But another DBS borrower, dissatisfied with the repricing terms, said she is switching to Stanchart after the latter countered with even lower rates and threw in a legal subsidy as sweetener.

Gregory Chan, OCBC Bank head of consumer secured lending, said refinancing customers should remember that cheaper offers elsewhere still come with some cost.

'Home-owners looking for refinancing should approach their existing banks first as the total cost of refinancing with another bank is usually relatively higher and has to be offset by lower interest rates,' he said.