Source : Straits Times - 7 Aug 2008
Bank says borrowers will then have more cash to seize other investment chances
DBS Bank has launched an unusual mortgage product allowing savvy customers to take advantage of cheap borrowing costs and free up cash for investment opportunities.
The bank is offering customers the option of paying only the interest for the entire duration of their home loan. They pay the principal amount in a lump sum only at the end of the loan term.
This means they have extra cash for investing - money that would otherwise have formed the principal component of the loan repayments.
This product is the first of its kind, claims DBS. Currently, banks allow customers to pay interest only on a mortgage for up to three years.
The new product has raised some eyebrows among market players who note that this package is controversial as it may encourage imprudent borrowing.
Mr Koh Kar Siong, DBS’ head of consumer deposits and secured lending, said the new mortgage is aimed at savvy investors.
‘This product allows customers to have cash on hand so they are ready to seize any investment opportunities available in the stock market or in other asset classes.’
Businessman A. Lin, 54, likes the idea of using an interest-only mortgage to ‘finance a very good investment property for perhaps four to eight years, while ploughing the free cash into alternative strategies like hedge funds’.
But for the general home owner, it makes more sense to pay down loans now, said Mr Bryan Ong, of mortgage consultancy bcgroup. com.sg.
This is because the three-month Singapore Interbank Offered Rate (Sibor) is at a four-year low of 1 per cent. So a larger part of your instalment would go towards repaying the principal sum.
DBS’ interest-only mortgage charges 1.5 per cent on top of either the three-month Sibor or 12-month Sibor.
The cumulative interest payment on this mortgage will be much higher than the interest paid on a regular home loan because the principal sum is not reduced.
But Mr Koh noted that this mortgage has features to ensure customers are not overstretched. They can borrow only up to 70 per cent of the property purchase price. This will be cut to 50 per cent after 10 years - so the product is only for customers with deep pockets who can afford a large down payment.
Mr Koh said the product may attract 10 per cent to 15 per cent of customers looking to take up a new home loan or to refinance their loans.
Other banks may not follow suit. United Overseas Bank’s head of loans, Mr Kevin Lam, said an interest-only mortgage ‘is an interesting idea but it is likely to appeal only to a niche group of customers’.
‘We take a prudent approach when offering interest-only mortgages by looking at the customer’s profile and ability to pay both the interest and principal,’ he said.
‘If a customer fits the right profile, why not offer a loan on a valuation of 80 per cent? But in general, most customers prefer to pay off their mortgages.’
Standard Chartered Bank (Stanchart) said it ‘offers interest-only mortgages upon customers’ request and on a case- by-case basis for customers in exceptional circumstances, such as those with short-term cash flow problems’.
Mr Dennis Khoo, general manager of lending for Stanchart, said: ‘We advise customers to exercise prudence and to be well-informed when selecting a mortgage, so that they would not be over-leveraged.’
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