HSBC unveils mortgage plan that promises interest savings

Source : Straits Times - 9 Jul 2008

In its new scheme, interest rate charged on top of benchmark rate drops each year

HOME loan customers typically expect to fork out a higher interest rate on the anniversary of their mortgages.

But in a novel move, HSBC has become the first bank in Singapore to turn this conventional practice on its head. It is launching a mortgage in which the interest rate charged on top of a transparent benchmark rate gets smaller each year.

This may mean some interest savings for customers, which

HSBC hopes will convince them to stay loyal to its package, rather than refinancing their loan to get a better rate in a few years’ time.

Ms Wendy Lim, HSBC’s head of consumer banking, said the bank introduced this package after conducting a study among home loan customers.

It showed that most of them ‘liked the concept of inverse pricing in their home loan rates, as it translates to more savings for them in the long run’, she said.

HSBC’s so-called ‘loyalty package’, which will be launched tomorrow, offers the three-month Singapore Interbank Offered Rate (Sibor) rate plus 0.75 per cent.

Currently, the Sibor is at 1.156 per cent - the lowest level in almost four years. So HSBC’s first-year rate will be about 1.906 per cent.

The spread on the mortgage rate drops further to the Sibor plus 0.65 per cent in the second year, and the Sibor plus 0.55 per cent from the third year onwards. The package has no lock-in period.

HSBC’s rivals currently offer Sibor-linked packages with spreads that either stay constant or rise over time.

DBS Bank’s Managed Mortgage offers a three-month Sibor plus 1.25 per cent annually for a package without a lock-in period, according to its website.

But DBS also offers a loyalty package at the Sibor plus 0.8 per cent for customers who stick to the mortgage for three years, said Mr Koh Kar Siong, DBS’ head of consumer deposits and secured lending. After three years, the rate goes back up to the Sibor plus 1.25 per cent.

Industry players say practically all banks offer promotional rates of the Sibor plus 0.7 per cent or even less for three years to their best customers. So this trumps

HSBC’s first-year rate of the Sibor plus 0.75 per cent.

Still, compared to a customer who pays the Sibor plus 0.7 per cent, a HSBC loyalty package customer may enjoy $3,859 of interest savings over five years on a 20-year, $1 million mortgage. This is based on the assumption that the Sibor does not change.

HSBC, which has one of the smallest home loan books among the seven or so major lenders in Singapore, may be looking to grab some market share by dangling cheaper rates.

But bankers say a price war is unlikely to break out as the market for new mortgage customers remains muted amid a relatively quiet property scene.

For customers contemplating a switch from another bank’s product to HSBC’s new loan, the legal costs of switching may still cancel out any savings, said one banker.

OCBC Bank’s head of secured lending, Mr Gregory Chan, noted: ‘We will continue to offer loan packages with promotional rates that are competitive compared to the other market players.