Time for a home loan u-turn

Source : Today – 6 Jul 2009

DESPITE the current global economic downturn, home buyers today are still spoilt for choice when it comes to taking a loan from financial institutions here.

Since January 2003, buyers of Housing and Development Board (HDB) flats no longer have to take a loan from the Government-backed provider of more than 82 per cent of Singapore’s homes. And since then, the HDB has stopped giving out what it terms “market rate” mortgage loans.

Instead of getting financing from the HDB, home buyers can obtain cheaper loans from a number of financial institutions who have since entered the HDB mortgage loan market.

Promotional rates from these institutions range from 1.5 per cent at Standard Chartered Bank for the first year to United Overseas Bank’s (UOB) 3.15 per cent for the first two years.

Yet despite the higher rate charged by the HDB there is still a significant number of HDB home buyers who take housing loans from the HDB at the “concessionary” rate of 2.6 per cent per annum which is pegged at 0.1 percentage point above the Central Provident Fund (CPF) rate. This, at a time when deposit rates are almost next to nothing and when the three-month Singapore Inter Bank Offered Rate (Sibor) is just 0.7 per cent.

Those with outstanding loans at the HDB’s market interest rate are charged 3.82 per cent per annum. This is based on the average of the non-promotional HDB housing loan rates of our three local banks – DBS (under its POSB arm), Oversea-Chinese Banking Corporation (OCBC) and UOB. This is reviewed on the 15th of every month.

For the financial year which ended March 30, 2008, some $2.36 billion was drawn in mortgage loans from the HDB, somewhat less than the $2.57 billion drawn in the previous year.

But looking at the relatively piddling returns the HDB makes on its mortgage financing scheme, one wonders whether the HDB should still be in the housing loan market at all.

For the financial year ended March 2008, the HDB made just $37 million in profits compared with its total income of just over $3 billion and expenditure of $4.25 billion. This however, was up from the measly $1 million it eked out in the previous year, compared with the $51 million it lost the year before that.

Even the term “concessionary” for its present scheme appears to be a misnomer – where is the concession compared with the promotional rates of the other financial institutions and Sibor rates? And even then, this concession is given to only those who meet certain conditions set by the HDB.

Perhaps many home buyers are afraid that should interest rates become too volatile and they start rising rapidly (and this has happened many times before), they cannot go back to the HDB. Although it allows existing HDB mortgagers to transfer their remaining loan amounts to other financial institutions for refinancing, those who do so “will not be allowed to refinance that loan with HDB subsequently”.

Many perhaps may have taken National Development Minister Mah Bow Tan to heart when he cautioned just after the HDB mortgage market was opened to the private sector: “Buying a flat is a long-term commitment. It’s not something that you decide because you can save a few dollars in the first or second year … Bear in mind that those rates (private sector’s) are valid only for the first two years.”

But that does not mean that HDB rates remain constant during the loan period. They too have to move up and down with the rest of the market, or the HDB could earn even less than what it does now.

Perhaps like other developers, the HDB should stick to its main purpose of providing affordable homes for the vast majority of Singaporeans who are not able to buy private property.

The housing needs of the most needy should of course continue to be taken care of. It may not be worth the effort and the criticism it draws from providing home loans.