HSBC’s new home loan package inverts model

Source : Business Times - 9 Jul 2008

Customers may pay lower rates in successive years in Sibor-pegged deal

HSBC is launching a radical home loan package - featuring a decreasing interest rate spread - which is making some rivals scratch their heads.

HSBC’s new Sibor- pegged home loan package with loyalty discount gives a reduction in the interest rate margin charged in the first three years - a first in the market.

Current loans pegged to Sibor (Singapore interbank offer rate) have either flat or increasing interest rate spreads.

This new Sibor-pegged loyalty package is unique because the interest rate spread reduces by 10 basis points at the end of every anniversary year, up to the third year of the loan, HSBC said yesterday.

Under the new loyalty package, the customer pays the 3-month Sibor rate plus 0.75 per cent in the first year; in the second year, he pays 3-month Sibor plus 0.65 per cent; and from the third year onwards, the rate is 3-month Sibor plus 0.55 per cent. The 3-month Sibor on July 1 was 1.25 per cent.

For a customer who pledges to stick with the bank for three years, DBS’s interbank-pegged home loan charges a flat spread of 0.8 per cent for each of the three years and then it’s 1.25 per cent thereafter.

United Overseas Bank (UOB) charges a flat spread of 0.8 per cent to two of its interbank-pegged home loan packages.

Standard Chartered Bank’s Sibor-pegged mortgage also charges a flat spread of one per cent.

Observers that BT spoke to wonder what the catch is for HSBC to slice its margins, given the increasing costs of doing business and also the uncertain economic climate.

‘They’re mad,’ said one rival banker, listing the various costs banks incur in selling a home loan including commissions to brokers and its own sales people, and legal subsidies offered to borrowers.

Said Kevin Lam, head of loans, United Overseas Bank: ‘It’s an interesting idea. UOB introduced a similar package in the past. We called it a step-down package.’

At the end of the day, a homebuyer has to consider the long-term and short- term gains versus costs, said Mr Lam.

HSBC said it is rewarding customers for staying with the bank. Asked how it will manage its reduced margins, it said it was a ‘trade secret’.

Said Wendy Lim, head of consumer banking, HSBC: ‘Our Sibor-pegged loyalty pricing is premised on feedback from a study we conducted among home loan customers. The majority of customers in the study said that they liked the concept of inverse pricing in their home loan rates as it translates to more savings for them in the long run.’

‘Customers are telling us that they want to be rewarded for their loyalty. So we are addressing the need with this innovative offer,’ added Ms Lim.

Koh Kar Siong, DBS managing director and head of consumer deposits and secured lending, said his bank listens to customer feedback too.

‘DBS was the first bank to introduce transparent interest rates pegged to Sibor or to the CPF Ordinary Account rate. This happened at a time when there was public outcry over the lack of transparency of banks’ mortgage rates,’ said Mr Koh.

UOB KayHian analyst Jonathan Koh said banks in Singapore are benefiting ‘from a steepened yield curve as they can utilise short-term funding, such as fixed deposits and savings deposits, for lending to businesses and consumers on a longer-term basis’.

He thinks HSBC’s new package will not lead to an aggressive home loan war, given the ‘overall economic climate and the fact that ‘on corporate and small and medium enterprise loans, margins are more attractive’.

Still, rival bankers are unlikely to give up their turf without a fight.

One said his bank is prepared to reduce the spread to 0.7 per cent on a case- by-case basis in order ‘to protect our customers’.

Gregory Chan, OCBC head of secured lending, said his bank regularly makes adjustments for its home loan packages.

‘As such, we will continue to offer loan packages with promotional rates that are competitive compared to the other market players,’ he said.