(F) hands chained: being locked in or tied up in a home loan

The Issue With Lock-Ins

With interbank rates on a decline after Brexit, we noticed how some lenders have gone aggressive on spreads in a bid to increase their market share of late.  What is of particular concern for us is how some clients might be signing on the wrong package if they decide based on just the lowest headline rate!

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First just to set the record straight, some of these “ultra-low” spread packages are offered on a direct-to-bank basis and customers must not come through a mortgage intermediary like a broker or third-party distributor.  We need to lay this out upfront so you know that there is no hidden agenda in this article.  In short in order to get some of these packages with 1-month SIBOR home loans starting at 1.14% or DMR packages starting at 1%, homeowners need to apply directly with the banks and not through us.  Once again, just like how we choose to tell all our clients back in June when one bank runs a promotion with Dyson fan for direct-only cases, we continue to stay true to our core mission – which is to build trust with all our clients for long term business and always letting them know of the best deals out there, even if it means no business for us sometimes.

There is no free lunch. By offering “ridiculously-low” spreads in the first few years of the loan that are too good to be true, there is always a catch – homeowners need to be locked in for a period of 2-3 years, and on a floating rate package!  We are of the view that lock-ins are absolutely fine for fixed rate mortgages, but not for floating rate.  The banks obviously need to recoup the “loss margins” and the only way is to make sure homeowners stay with the bank even when rates start to move up later and people start scrambling again for the best fixed rates in offer.  To put it in another way, there are only two ways to make profit – either grow the margin, or grow the volume.  When margins are sacrificed, the volume need to come in and stay in for a period so that the banks can earn their interest income.

In general we are strongly against lock-ins on a floating rate package, or at the very least nothing more than a year, and we have good reasons to advocate that.  No one knows which way interest will swing in 2017, sometimes market can bounce back strongly within 6 months quickly causing all analysts and economists to revise their forecasts.  We have suspended giving any take on where we see SIBOR ending the year, until the dust settles which we estimate could be only in early 2017.

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What happens when one is on a floating rate package and US Fed hikes its funds rate one or two more rounds from now till end of 2017?  That cannot be totally ruled out yet.  Two rounds of 25 basis points hike or 0.50% increase would see floating rates going above the prevailing 2-year fixed rate currently in the range of 1.51 to 1.68%.  By then fixed rates would also have risen back to 2% level.  Imagine what happens when one is locked in for 3 years on such a floating rate package – there is no other recourse available except to call one’s existing bank for a repricing offer which brings us to our main point.

This is where the real danger lies and most people are not aware – when it comes to repricing, whether or not one is locked in makes a whole world of difference, in terms of the spreads that the bank will quote.  We have witnessed so many times over in the last 2 years that when someone is still within the lock-in, he will definitely not be quoted the same rates for new clients, in fact the spreads quoted is so much higher that it often incurs the wrath of existing customers.  Still he remains helpless in this situation, as long as he is locked in.

It is all down to one’s bargaining position – if one decides to give up his position of power in negotiation to the other party by signing away his right to walk away, then do expect to end up with a less favourable deal.  This is the case for all business negotiations.  In this regard, it is a pure commercial transaction and no one should cry foul, as the lender did sacrifice product margins to exchange for a lock-in, fair and square.  We urge our clients not to be “seduced”no matter how low the margins or spreads, as we think the difference of that few basis points between a floating package that comes with lock-in, and one that does not, is not significant enough to warrant this tradeoff.  Speak to our consultants today who can calculate and show you the difference in terms of cashflow between the two based on various interest rate scenarios.  We think the flexibility to be able to drive a hard bargain later or switch to fixed rate with another lender within the next 2-3 years should rates move up is an even greater asset.  Do not give up this bargaining chip too easily as the ability to secure a good fixed rate later on, when all global uncertainties subside and rate hikes return, is much more crucial than getting the best refinancing home loan rate now.

At MortgageWise.sg, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of Singapore home loans.

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