Pay-Interest-Only Deal For Cash-Short Home Owners

Source : The Straits Times, January 13, 2009

DBS scheme eases borrowers' burden for six to 18 months

HOME owners with mortgages at DBS Bank can ease some of their financial burden by opting to pay only the interest on their loans for periods of up to 18 months.

The bank sees the scheme as a way of helping cash-strapped borrowers who are worried about their ability to repay their mortgages amid the deepening economic gloom.

The scheme could potentially benefit 'tens of thousands' of borrowers with home loans at DBS.

It can mean an immediate reduction in the monthly amount a borrower must fork out as a key portion of the payment - the loan principal - can be set aside.

Take a 25-year home loan of $500,000 pegged at an interest rate of 3.5 per cent.

A borrower will have to pay $2,504 a month - covering both interest and principal.

But by opting to pay the interest only, his monthly payment drops to $1,439, putting an extra $1,065 into his pocket.

So even if a working couple loses one income, which is a growing threat in the downturn, they can likely keep paying their mortgage - and keep their home.

They can also pay the monthly instalment using Central Provident Fund cash if they are only servicing the interest on the loan.

They can resume monthly payments on the principal portion of their loan when their cash flow situation improves.

The periods for paying interest only can extend from a minimum of six months to 18 months.

'The last thing we want to do is to foreclose on people's homes. Come and talk to us early if you have any financial problems,' said Mr Koh Kar Siong, head of consumer deposits and secured lending at the bank, yesterday.

Homeowner Rose Tan, 40, who has a DBS mortgage on her condominium flat, welcomed the move: 'This is a friendly gesture from DBS. At least, I know they won't treat me like a leper if I approach them for help in lowering my housing instalment.'

The flip side is that paying interest-only means you are not paying off any of the loan itself so you will have fallen behind.

DBS is the largest bank here and a key player in the private housing loans market. It is also a big lender to HDB flat-owners through its POSB network.

It has 'tens of thousands' of mortgage borrowers.

To get the go-ahead, a borrower must give the bank an update of details such as employment and other financial commitments.

The scheme is applicable to cash-strapped borrowers as well as those in the pink of financial health.

DBS will advise them within a week if their applications to pay interest-only on their loans has been approved.

Mr Koh said the updates are needed to enable DBS to fulfil its fiduciary duty and ensure that borrowers have the means to repay their loans eventually.

Besides offering interest-only instalments, DBS is extending an option to allow home owners to extend the tenure of their loans, which will lower their monthly instalments.

Mr Koh said there has not been any sharp rise in the number of borrowers asking DBS to alter their loan repayment terms but banks are unlikely to be immune to the economic slowdown.

'About 90 per cent of our home loans are taken up by borrowers who occupy their properties. We want to help them to tide over this difficult period,' he said.

DBS' move has stirred hopes among traders and home owners that by acting in such a pro-active manner, there will be fewer foreclosures and this will help the wobbly property market to get back on its feet eventually.

Banks such as MayBank and OCBC Bank told The Straits Times that they preferred to take a case-by-case approach to assist home owners who have taken up loans with them.

Mr Gregory Chan, OCBC's head of secured lending, said: 'In the event that our customers' needs change during the duration of their loans, we are open to reviewing their financial positions and borrowing limits, and advising them accordingly.'