No More Cheap Mortgages As Banks Raise Rates

Source : The Straits Times, June 10, 2008

Hike of up to 1 percentage point for some fixed rate packages to 3.98%

THE days when you could lock in cheap mortgage rates for the first year or two seem to be over, now that banks have quietly jacked up rates for new fixed-rate loans.

Just five months ago, banks were dangling teaser rates on the first year of their fixed-rate home loan packages. Maybank had a package that offered 1.68 per cent, while United Overseas Bank's (UOB's) FirstZero product carried zero per cent.

But now, homebuyers would be hard-pressed to find rates fixed on the first year of a mortgage at below 2.68 per cent, as some banks had already raised the rates of certain packages by up to 1 percentage point in recent weeks to as high as 3.98 per cent.

UOB and OCBC Bank have raised rates for their three-year, fixed-rate mortgages to 3.68 per cent from 2.98 per cent. Standard Chartered Bank has raised its rate for its two-year, fixed-rate package to 3.78 per cent a year from about 2.68 per cent.

This means new home buyers will have to grapple with much higher costs of borrowing, if they want the certainty of locking in their interest rates for the next few years.

A new customer will fork out about $3,500 more in interest for the first year on a loan of about $500,000, if the rate has been raised by 0.7 percentage point.

Banks may have turned cautious and are raising mortgage rates amid a slowing property market and an uncertain economic outlook.

They are facing 'increased credit risks on housing loans', suggested Mr Dennis Ng of mortgage consultancy portal www.HousingLoanSG.com

The higher fixed rates may prompt more buyers of new homes to take up loans linked to transparent rates that they can easily monitor. These include the Singapore Interbank Offered Rate (Sibor) - the rate at which banks lend to each other - and the swap offered rate (SOR), which is Sibor plus a bank's lending costs.

Existing holders of home loans, whose fixed or variable rates are up for renewal in the coming months, may also find floating rates more attractive, as the difference between fixed rates and those linked to Sibor or SOR widens.

Customers with loans linked to the 12-month Sibor, which is hovering at about 1.7375 per cent, are still enjoying rates as low as 2.4 per cent that is fixed for a year - a difference of 1.3 of a percentage point compared to some newly-hiked, fixed-rate packages.

Some banks, however, have also started to raise rates linked to Sibor and the three-month SOR, currently at 1.4307 per cent. Some banks have raised their SOR-linked packages by 0.1 of a percentage point, or more, to as much as SOR plus 1 per cent.

DBS Bank has not changed its rates - yet. Market sources say the bank is preparing to introduce new - and higher - rates for both its fixed-rate and Sibor-linked packages in a few weeks.

Still, the banks' rate increases may raise eyebrows since the Sibor and United States Federal Reserve rates appear unlikely to climb sharply in the coming months.

Market talk that the Fed might soon raise interest rates to curb inflation was quashed last week, with an unexpectedly sharp surge in the US unemployment rate to 5.5 per cent last month.

One banker, who declined to be named, said the Singapore banking industry's motives for raising fixed rates this time, however, might 'have less to do with current Fed rates than expectations that Sibor is close to bottoming out'. Thus, market players may now be raising rates to squeeze higher margins from new loans.

A banking analyst said banks had enjoyed a roaring mortgage business in the past year, and some had already hit most of their 2008 targets.

'So, they may now be focusing on credit quality and growing their margins for any new loans,' he said.

The question on the minds of home owners is whether this fixed-rate mortgage hike is an ominous signal of an eventual rate hike for all other packages. This may cool the already lukewarm property market further.

Bankers, however, kept mum about their pricing strategy, pointing out instead that the current mortgage rates were still at historical lows.