lady finger to mouth - what bankers will not tell you about home loans

What The Banks Don’t Tell You Part 2 – Board Rates

In this 2ndpart of our 3-part series on “What The Banks Don’t Tell You”, we will discuss one of the most traditional ways of pricing mortgage in Singapore – Board rates.

Just this week one major lender suspended all board rate packages all of a sudden except for its BUC (Building-Under-Construction) loans.  We have earlier predicted the demise of board rate home loans with the launch of DMR (Deposit Mortgage Rate) packages and this development is hardly surprising to us.

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In fact one local bank just raised the board rates for some of its existing clients signed onto board packages just a year ago at 4.5% to 5.5% p.a, a whopping 1% increase which is a hard pill to swallow.  And just look at how in recent weeks when both SIBOR and SOR retreated quite significantly (temporary reprieve in our view) due to more dovish views coming out from US Fed resulting in a weakened US dollar, the banks are not about to drop back on their Board rates anytime soon; unlike those who are pegged to market indices like SIBOR and SOR who will get their interest rate adjusted downwards for this current quarter.

Understand that the bank will have the least reservation about pricing its Board packages to be the lowest in the market, especially in terms of headline interest in the initial years.  And the reason for that is simple – the bank has the most control over its Board rate unlike SIBOR etc.  Or to put it in another way, banks often cleverly lure people away from both their higher-costing (to the bank) fixed rate packages and their “fixed spread” SIBOR packages, by dangling the lowest headline interest on board packages.  Why so?  Because it knows that after attracting a sizeable portfolio of loans on Board rates, it can then adjust its board rate quietly upwards in the following year to increase its spreads and to make matters worst, most of these clients are usually locked in to the bank for a period of between 1 to 3 years.  And most banks will give lower rates for Board packages with 3 year lock-in versus 1 year lock-in so as to tie homeowners down for a longer period, on the pre-text of giving them the lowest rates in the market.

In mortgage pricing, Board gives the bank absolute pricing power and remains the best tool for increasing its NII (Net Interest Income) compared to SIBOR loans where the spread above SIBOR is already fixed.  Furthermore, especially in local banks, different groups of borrowers are assigned different board rates and the bank may decide to increase the board by varying degrees across different segments of its mortgage clients, depending on their “price elasticity” or how easily they can move their business elsewhere.

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Banks had it easy selling Board packages in the past decade with SIBOR languishing in the sub-1%, usually with the sales script “Board has not moved since 2006”.  That has all changed in the past year.  Homeowners cannot base the movement of Board on historical trends as the basis is no longer valid.  We have explained this many times to clients – Board is the lever that the bank use to up its interest income and in the past there is no reason for the bank to lower it which means decreasing its earnings, neither does the bank want to incur the wrath of existing customers by raising Board when there is no justification for it when SIBOR stays down persistently.

We think that Board will be passe, and die a natural death as the market sways towards new mortgage pegs like DMR.  And we are expecting more banks to follow this trend with their own versions of DMR which may also be pegged to savings account of the bank especially for foreign banks.  That bags the question – will DMR become the new Board in time to come?  Afterall deposit rates are also set unilaterally by the bank.  This is a merited concern indeed but there are also some differences between the two.  This will warrant a separate discussion on another article, so stay tuned to this blog.

To wrap up, what is it that the banks don’t tell you – that they have absolute pricing control on Board rates and that is the reason why Board packages are almost certainly priced the lowest especially for headline rates in the first few years.  So do not just dash for lowest rates advertised.  Watch this space for the third and final part in our 3-part series on “What The Banks Don’t Tell You”.

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements.  Make a difference to the way you refinance home loan today by consulting with a professional whose insights, experience and independent advice you could benefit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of home loan Singapore.

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