Last weekend Strait Times (28 Mar 2015) ran a report on how some borrowers were upset with one bank here in Singapore who unilaterally raise the spread (or margin) on their sibor-pegged home loans from 1 April this month onwards.

One such customer Mr Lee, who was interviewed in the same report, was quoted as saying that his spread had risen from 0.65 to 0.85 per cent but he had thought the spread would stay at 0.65 throughout the entire tenure of the loan, as per what he had contracted for in his letter of offer from the bank.

Indeed, there was a group of lucky borrowers who had “locked in” such unbelievable “thereafter spreads” with the banks during the period of late 2010 to 2011.  Spreads refer to the mark-up on top of the bank’s cost of funds in this case sibor or the Singapore interbank offer or lending rates.  This forms the margin or profit for the bank.  Thereafter spreads refer to the spread that applies after an initial promotional period of usually one to three years.   Currently banks in Singapore typically dangle low spreads like 0.80 to 0.90 during the promotional period and raise this to 1.25 from year four onwards.  Some borrowers who signed on sibor loans during 2010 to 2011 had been enjoying ultra low spreads like 0.65 t0 0.75 during promotional period and even thereafter until the end of the tenure as per contract signed with the bank.

At MortgageWise we have spoken to some of these customers who had been told by their banks not to ever give up or refinance such loans, as they can never get back such unbelievable thereafter spreads later.

With this latest incident, the question to bag now is can banks unilaterally change or raise the spreads contracted under terms of the letter of offer?  The answer is quite simply yes.  Some might not be aware, there is always a clause in all letter of offers that all banks will include that will read something like this :

“Notwithstanding any provision contained herein, the Bank shall have the right to amend, modify, supplement and/or suspend the terms and conditions of this Facility Letter at any time and from time to time, whether before or after acceptance of this Facility Letter, by giving you written notice of the same.”

This clause can come in different phrasing but with the same effect.  In short, the bank always reserve the right to vary any of the terms in the letter of offer including of course the interest rates and spreads, even the right to recall the loan unilaterally if it wants to.  However there is no reason for the bank to exercise this right to vary interest rates especially when borrowers have been diligently and promptly servicing the monthly repayments.  They can do so legally but risk facing the ire of customers and may bring about some reputational risks.

Still with ever changing operating environments, banks may be hard pressed for more profits and some may be forced to raise their business margins.  What one group of management may have decided as appropriate margins at one time may not deemed sustainable or even feasible by a later group of management.  This is especially true for contracts that spread over a long period like mortgage loans.  So borrowers need to be prepared for such “surprises” especially when spreads look too good to be true for the long haul.

Even before this latest episode, we tell our clients that they need to think realistically about the benefit of such low thereafter spreads and if they should still stick with them when interest is on its way up from here.  Why do we say that?  First such benefit may be more perceived than real for some.  For example, if you have plans to sell your property say 5 years from now due to the need to be nearer the school of your choice for your kid, the benefit is not real.  It is only good for 5 years.  Yet with sibor moving up in the next 5 years, a wiser thing to do is to lock in fixed rates for 3 to 5 years.

In marketing, we have learnt that all consumer decisions are based on emotions rather than logic, even in complex financial products which you may think initially are all about logic and numbers.  Think again.  The next time you go for a social gathering with friends say 2 years from now when sibor reaches 2% p.a. and the topic turns to mortgages, and one of your friend go like “Thank God my mortgage broker (from MortgageWise) asked me to lock down fixed rates at 1.88% p.a. else I will be paying through the roof by now!”, how would you feel if you are still on sibor+0.65 albeit that’s thereafter until the end of the tenure?  Only you will know the answer.

At MortgageWise.sg, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner when you buy condo Singapore. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.