Friday, August 12, 2011

Say goodbye to SOR-pegged home loans soon?


A number of mortgage brokers have received word from two banks to stop offering home loans pegged to Swap Offer Rates (SORs), BT has learnt. Another bank, too, has introduced a new clause into offer letters setting a floor for the SOR used in its home loans.

All these are taking place at a time when SORs for certain time periods have turned negative. The three-month SOR reached a new low yesterday, dropping to -0.6987 from -0.0119 on Wednesday. The six-month SOR also fell further to -0.99258 from -0.06622.

The SOR represents the synthetic cost of borrowing Singapore dollars, by borrowing US dollars for the same maturity and swapping these in return for Sing dollars.

Unusual market conditions have forced SORs into negative territory. Economists attributed this to fund inflows – investors have flocked to safe havens such as Singapore especially after the United States lost its triple-A rating. The expected appreciation of the Sing dollar against the greenback has also pushed SORs down, they said.

Negative SORs put banks which offer SOR-linked home loans in a difficult position. Banks typically set mortgage rates at a spread above the three-month SOR. The lower the SOR, the less they earn.

“I think the banks will shift away from SOR-plus mortgages given the increased volatility that’s been seen,” said Bank of America Merrill Lynch economist Chua Hak Bin.

Some mortgage brokers told BT yesterday that they received notifications from DBS Group and Maybank to stop offering SOR packages from the banks, with immediate effect.

DBS did not confirm this, but a spokesman said: “SOR-pegged loans are not part of our standard offerings. In view of their inherent volatility and the long-term nature of mortgage loans, such products are deemed unsuitable for retail customers who buy residential property for owner occupation.

“As such, they form a very small part of our portfolio and are usually offered upon customer’s request. Our terms and conditions do allow the bank to introduce a minimum or floor rate for such benchmarks.”

The bank also said that its floating home loans are mainly tied to the Singapore Interbank Offered Rate (Sibor).

As for Maybank Singapore, its consumer banking head Helen Neo said: “We currently do not offer SOR-pegged loans.”

Just a few months ago in April, Maybank has introduced a new package called the ceiling-rate home loan that is pegged to the three-month SOR.

The bank launched it together with another product called the hybrid-rate home loan, which is pegged to either the Sibor or a fixed rate in different years. Ms Neo said yesterday that the hybrid-rate home loan is now the bank’s most popular one.

Some banks had moved earlier to withdraw SOR-pegged home laons from the market.

According to a United Overseas Bank spokesman, the bank stopped selling SOR-pegged packages with effect from Aug 1 and introduced Sibor-pegged packages to meet customers’ demand for a less volatile reference rate”.

On the other side of the fence is Australia and New Zealand Banking Group (ANZ), which will continue to offer SOR-linked home loans. However, it added a new clause to offer letters issued from yesterday, setting a floor of 0.1% for the SOR used. This is to “ensure greater clarity on our pricing structure”, said ANZ Singapore head of retail banking and wealth management Philip Lim.

ANZ’s home loans are either pegged to the three-month Sibor or SOR. The rates are based on those fixed on the first business day of the month, so the recent negative SORs have not affected home loan rates, Mr Lim said.

“We are currently comfortable to continue offering SOR-pegged home loan packages,” Mr Lim added.
Source: The Business Times

When the wife and I said yesterday that we are unconvinced about the sustainability of the depressed SOR rate, we certainly did not expect it would come in the form of our banks pulling the plug on SOR-pegged home loans.

While we can barely appreciate the need for banks to set a floor for the SOR used (although we reckon it has more to do with protecting the banks’ bottom-line rather than “ensuring greater clarity on the pricing system”), we are absolutely astounded by the reasons given by banks that have stopped offering SOR packages.

If banks have stopped selling SOR-pegged packages because they are listening to customers’ demand for a less volatile reference rate, why was the decision to terminate made only when SOR started to plummet and eventually gone negative?

And if SOR-pegged loans are indeed unsuitable for property buyers who buy residential property for owner occupation (supposedly due to their inherent volatility and the long term nature of mortgage loans), maybe the Monetary Authority of Singapore should consider outlawing banks from offering such packages for residential home loans?

We recall a time not that long ago (when the USA was still triple-A rated and SOR was positive) whereby some banks will only offer home loan packages linked to SOR. And if you ask for other non-SOR packages, it will be met with great reluctance and at much higher interest rates.

After the dust is settled and SOR starts to climb again, it will be interesting to hear the kind of “justifications” that banks will come up with to restart their SOR-pegged home loan packages again…

Watch this space!

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