Banks Poaching Home Loan Customers With Sweet Offers

Source : My Paper, April 18, 2008

AS HOME sales continue to slide, banks are going all out to hang on to their existing home loan borrowers.

Some poach from their rivals while others are 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, The Business Times reported yesterday.

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, customers can fix the monthly payments for 36 months regardless of interest rate changes.

Standard Chartered 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 - those who do not have to pay a penalty if they repay the loan in full.

"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," saidMr Dennis Khoo, Stanchart general manager, lending.

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.

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 depends on the total relationship as the bank may have to stomach the loss," said Mr Khoo.

Mr Koh Kar Siong, DBS managing director and head of secured loans, said clients 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.

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

"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.