MAS to make home loans more transparent

MAS hopes to work with banks to make mortgages more transparent for borrowers. ST PHOTO: LIM YAOHUI

Tan Ooi Boon

Invest Editor

Published

Jan 2, 2022, 5:00 AM SGT

SINGAPORE - Sky-high credit card debt that leaves home owners struggling to pay their mortgages can often mean default is not far down the track, but one bank has a pleasant surprise in store for some of these borrowers.

They were offered a chance to reprice their loans at a lower interest rate even though the mortgages were still bound by a lock-in period that usually prevents this.

The unusual move means these customers have actually been given a "goodwill bonus" by their bank because a lower interest rate will enable them to save at least a few hundred dollars on their repayments every month for another two to three years.

This pro-customer move by the unnamed bank was highlighted by the Monetary Authority of Singapore (MAS) in one of its regular thematic inspections, which focused on the residential mortgage pricing and disclosure practices of financial institutions.

It also commended some banks that proactively identified customers whose mortgages were nearing the end of their lock-in periods so that repriced packages that were more favourable than the existing loans could be offered.

Home loans are likely to be the biggest costs for most families here, so the regulator hopes to work with banks to make mortgages more transparent for borrowers.

Mr Marcus Lim, the MAS' assistant managing director (banking and insurance), says mortgages are major long-term financial commitments and banks have a duty to help consumers make informed decisions.

While the regulator found that banks here generally comply with the rules relating to home loans, it noted two instances where they took pricing decisions that were not aligned with common understanding and were seen as unfair by customers.

Slow to implement changes when rates fall

Prevailing low interest rates mean the rate for fixed deposits has been easing. As some mortgages are pegged to these rates, borrowers with such loans should be paying less as well.

But in some instances, the banks did not revise the corresponding mortgage rates for a few months, delays that were unfair to customers, who expected their rates to be adjusted in tandem with market conditions.

Moving the 'floor rate'

Most loans, including those with "floating" terms that can change due to market conditions, have a component that remains fixed for the whole tenure. Most customers would not expect such floor rates to change, but one bank did just that recently for some of its loan packages.

The MAS noted that the banks had taken action to identify customers who were adversely impacted and offered the option of repricing at no additional cost.

But it expects banks to clearly explain to customers how their mortgage interest rates fluctuate and the circumstances under which changes to rate components could be triggered.

"One bank had deferred the interest rate increase for a group of customers who had just taken up the mortgages. We encourage banks to proactively engage customers, especially when adjustments may come across as unexpected by customers," the regulator said.

What you can do

If you plan to buy a new property this year or already have an existing mortgage, you should pay closer attention to such loans as one of your New Year resolutions.

While buying a new home is surely worth celebrating, you should spend more time studying the loan packages because this can allow you to save a few thousand dollars each year.

Many people do not realise home loans cost a bomb - for instance, if you take out an $800,000 loan for 30 years, you could end up paying over $300,000 in interest even at today's low rate of below 2 per cent.

If the rate starts to climb, your monthly repayments can go up gradually, from about $2,900 to $3,500, $3,900, $4,400, $4,800 and $5,300, with every 1 percentage point rate increase. This is not something unusual as interest rates change all the time depending on the state of the global economy.

Know what you pay for

There is no such thing as a "stupid question" when it comes to your hard-earned money. So don't be shy when you meet your banker because you need to ask many questions so that you can pick the correct loan package.

There are two broad categories - fixed and floating packages - but there are many choices within each category and this makes it hard for you to choose if you don't spend time studying them. To add to the confusion, other banks also have similar packages, so if you are searching for the cheapest loans, you could end up looking at 30 to 50 different packages.

Just like any investment, it boils down to your risk appetite. For instance, it seems to make more sense to choose floating packages now, especially those involving the new Singapore Overnight Rate Average interest rate benchmark, as it offers some of the lowest mortgage levels.

But you need to ask your bank how future rate increases can affect the quantum of your monthly repayment so that you won't be surprised by any big jumps.

Similarly, even if you go for a fixed rate, look at the overall deal, and not just the lower rates for the first two years. Finally, never choose any package based on the free gifts that some banks offer. If you score a good loan, you can buy those gifts yourself with the savings, and that is just in the first year.

Know how the changes come

Change is the only constant for all deals that involve money. So you need to ask your bank for various scenarios that will trigger a rate revision of your home loan. And if there is a hike, you need to know how much time you have before you would need to allocate more money to pay the instalments.

Of course, no one will complain if the change results in you paying less every month.

But you should plan for big jumps, such as choosing "floating" loans that provide a cap on the rate increase for the first few years to counter the risk of runaway rate hikes.

Know the contingency plans

It seems odd to ask about the repricing process when you are signing up for a new loan, but you should ask anyway because it is usually cheaper to do this with the same bank. Loan repricing is something that all borrowers should actively look at regularly, especially when the new rates are more favourable.

You should also ask about loan redemption - how you can pay lump sums to reduce your loan without incurring penalties. Some people say it is silly to pay off home loans this way when you can use the extra cash to invest and earn more.

But you won't be singing the same tune if the rates start to go up. And people who have less or no debt usually sleep better at night.