Sibor dives, but home loan rates go up

Source : Straits Times - 19 Feb 2009

A KEY interest rate that sets the cost of interbank lending has plunged in recent weeks, but those taking out new mortgages will be no better off.

The three-month Singapore Interbank Offered Rate, or Sibor, dived to 0.68 per cent this month, bringing it near the all-time low of 0.63 per cent reached in June 2003.

The rate at which banks lend to one another has been dropping since September last year, and is expected to stay low.

But new home buyers expecting interest rates for Sibor-linked housing loans to fall in tandem will be disappointed.

To compensate for increased risk and the higher cost of capital, most banks have upped the spreads that they charge above Sibor, making Sibor-pegged home loans more expensive.

At DBS Bank, a home buyer taking a loan of 80 per cent of his property’s value in July last year would have paid a rate of Sibor plus 1.25 percentage points. Now, a new buyer has to pay Sibor plus 1.75 percentage points.

Even though Sibor fell from 1 per cent to 0.68 per cent between last July and now, the rate charged has actually risen from 2.25 per cent to 2.43 per cent.

The margin on HSBC’s standard Sibor-pegged package now stands at 1.25 points, up from 0.7 point last July. The rate has effectively risen to 1.93 per cent, from 1.7 per cent.

However, at least one bank - Citibank - has not raised its spreads on Sibor-linked loans. A customer applying for a loan now would get the same rate as last July’s.

The bank’s head of secured finance solutions, Ms Vibha Coburn, said it has remained consistent in the pricing of spreads on Sibor-linked packages.

Its range of spreads is still between 0.8 percentage point and 1.25 percentage points, ‘depending on the extent of the customer’s relationship with the bank and the type of home loan package’, she added.

Rising spreads will affect a growing number of borrowers as Sibor-linked loans have become increasingly popular after banks introduced them about two years ago.

One reason for their popularity is their transparency when compared to loans pegged to banks’ own board rates.

However, although new loan applicants will feel the pinch of the higher rates, home buyers who locked into the more competitive Sibor-pegged mortgages last year are seeing their monthly instalments fall steeply in line with the nosediving Sibor.

Loans pegged to the Singapore dollar Swap Offer Rate (SOR) - another popular benchmark interest rate - have also been hit by the increasing spreads.

OCBC Bank is now charging SOR plus 1.75 points for its home loan, compared to plus 1.25 points just two months ago, according to a news report last December. This means its rate has increased from 2.25 per cent to 2.43 per cent.

Banks said they have raised their spreads because the credit crunch has made lending more expensive and riskier.

‘Unlike the period of robust property markets in 2006 and early 2007, banks now have to contend with higher capital costs and increased credit risks, given the current financial turmoil and economic crisis,’ said Mr Gregory Chan, OCBC’s head of consumer secured lending.

Mr Dennis Ng from mortgage broker www.HousingLoanSG.com agreed: ‘Property values have fallen, so default risk has definitely gone up. It’s natural for banks to increase the interest margin to cater for this higher risk of lending.’

The higher margins are also being introduced because banks are seeing fewer home loan applications as the property market softens.

‘If banks reduce rates, they face not only a decline in loans growth but also a decline in margins, which could affect them quite badly,’ said Mr Ng. ‘So they may increase their margins to make sure revenue doesn’t drop that much.’

No update was available from two other banks here that offer Sibor- or SOR-linked home loans: Standard Chartered Bank could not respond by press-time while United Overseas Bank declined to comment.