Breath of fresh air in home loans market

Source : Business Times – 8 Aug 2009

Banks slash spreads on Sibor-pegged loans; 80 and 90% property financing now available

CREDIT conditions have eased markedly in the competitive home loans market, thanks to improved confidence and liquidity in the property sector. Banks have slashed the spreads they charge on Sibor-pegged loans, and mortgage brokers report the renewed availability of 80 and 90 per cent financing for property.

This is in sharp contrast to the backdrop that prevailed in the first quarter when amid gloom over the economic outlook and falling home price valuations, banks reportedly tightened lending criteria.

At that time, the spread on Sibor loans soared past 1.75 per cent depending on the loan-to-value ratio and whether the property is to be owner-occupied or for investment. For investment property, banks reportedly declined to offer financing higher than 70 per cent. Even for owner occupied home loans, 80 per cent was just about the maximum financing that banks would offer.

Now is a good time to secure fairly low interest rates, whether you’re in the market for a new loan or looking to re-price or refinance your current loan.

The three-month Sibor has been hovering at about 0.68 per cent for a few months, not far from the 10-year low of 0.56 per cent in 2003, based on Bloomberg data. The swap offer rate or SOR, which is used by banks such as OCBC stands at about 0.62 per cent.

Most observers do not expect interbank rates to trend up in the near term, particularly as the sustainability of the economic recovery remains in question. A UOB spokesman says: ‘Interest rates are anticipated to remain relatively flat at the current level in the months ahead. The trend for home loan rates will be dependent on market competition, cost-of-fund environment as well as global economic conditions.’

Based on rates obtained by Morgan Mortgage International, a mortgage consultancy, OCBC has some of the most attractive rates. Its variable rate package – home loans based on its ‘value rate’ or board rate – is quoted at 1.68 per cent for the first three years. While SOR loans with no lock-in are reportedly quoted at a spread of 1.25 per cent, those with a one-year lock-in charge an attractive spread of 0.85 per cent for the first year.

Fixed rate loans are also available with the first year rate quoted at below 2 per cent, for those who prefer certainty in their monthly payments.

Morgan’s Patrick Tan says that the firm has seen a 50 per cent increase in loan applications. ‘Refinancing activity is slowing down and making way for new loans . . . We believe we’ve reached the bottom in interest rates.’

The loan rates are supportive of an upturn in the property market, particularly as risk-free interest rates in terms of deposit rates and Singapore government bond rates remain low. A number of banks pay just 0.125 per cent for modest amounts. The yield on two-year SGS is quoted at 0.383 per cent, and five-year SGS at 1.34 per cent.

There are, of course, other factors that have buoyed sentiment, as reported in BT on Thursday. Pent-up demand is one factor, arising from the fact that current pricing is still below the 2007 peak. Yet another factor is a slowing of Housing & Development Board construction over the years.

Says Joseph Chong of New Independent: ‘The outlook is always uncertain, but it is less uncertain today than it was six months ago. We’re watching for policy errors like premature tightening. If there are no errors, the outlook is pretty good.

‘Right now, it’s not just rates that are low, but the availability of money is high. The asset cycle is turning and liquidity is plentiful.’

An OCBC spokesman says: ‘The housing market is currently very vigorous and we see great strength for new properties in the mass market. In the last few months, we’ve seen a lot of upgraders like young families entering the private property market.’

For now, it seems the bank sees little signs of froth. ‘We do not see great movements in the bigger priced properties, current movements are more or less limited to the mass market. We also do not see a great deal of speculation either as these transactions involve mostly owner-occupied homes.’