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Compare Singapore home loan: Source of funds

July 7, 2009 by property
Filed under Compare Singapore Home loans

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Compare Singapore home loan: Source of funds

In Singapore some people say that variable rate singapore home loans

carries the most risk. They said, the risk comes not so much from local

banks but more so from foreign banks.

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In order to compare Singapore home loan packages, it is sometimes also

important to understand the "engine" underneath it.

Variable rate home loan packages Risks

Many people say that foreign banks will raise rates soon as they do not have

access to cheap funds.

So are local banks such as DBS, OCBC and UOB safer than the foreign

banks? Safer from raising rates for the variable rates mortgages.

The premise of most of these talks centred around an assumption that local

banks have a vast pool of cheap and low cost funding in the form of

deposits.

Some people claim that DBS and OCBC and UOB will not so likely raise

Variable home loan rates

Therefore some claim that DBS, OCBC and UOB are safer for the borrowers

because they do not raise rates indiscriminately (for variable rate packages).

For some, safer means a perceived safety in terms of financial strength of

the bank.

All banks in Singapore have to pass the stringent requirement set by the

Monetary Authority of Singapore (MAS) and also pass the capital adequacy

ratio requirement.

In terms of safety, Singapore’s banks regardless of local or foreign are quite

solvent.

MAS rules and requirements applies to both the local and foreign banks.

Ms Angelina Fernandez Director (Communications) Monetary Authority of Singapore said on 26 Sep 2008 (My paper). “Our regulations also require foreign-bank branches in Singapore to maintain a proportion of the assets of their Singapore branch in safe and liquid Singapore dollar-denominated and Singapore-domiciled assets.”

In any case, depositors have first claim over assets of any banks in the case

of a wind up. The funds required as a deposit by the banks will be used to

compensate the savers first.

Are Local banks really safer and less likely to raise rates?

Is it fair for banks to claim that their variable rate home loan packages are

safer from raising interest rates if buyers go with their variable rates home

loan just because they are local?

Do local banks really have lower cost of lending and therefore will not raise

home loan lending rates for variable rate loans as easily as other foreign

banks?

First and foremost, banks will not tell you how much funding and what is

their cost of funds as it is somewhat secret. But you can find some related

information in their financial report if they are listed entities, in other words,

you can guess what is their cost of funds. Also commonly known as WACC,

Weighted average cost of capital.

So how would we know local banks won’t raise rates?

Secondly, there is no guarantee that lower cost translate into lower lending

rates, of course higher cost will almost certainly translate into higher lending

rates. If the prevailing lending rates have increased, what would stop the

banks from raising rates to improve their margins?

The only guarantee is competition and a robust market.

As we have seen in the earlier months when many local banks go into risk

aversion mode and raise their rates on new home loans, it is therefore also

safe to say that, they could also raise the rates on their existing loans. The

only guarantee seems to be Competition. Competition ensures that the

banks price their rates right, so consumers can benefit.

Foreign Banks versus Singapore banks

Many foreign banks have now obtained the QFB status. QFB stands for

Qualified Full Bank. This means that they can obtain deposits and operate a

full range of banking services in Singapore. That makes them no different

from local Singapore banks, perhaps with the main difference being of scale

and the allowed number of branches. Many foreign banks already operate

like local banks and are staffed with locals.

Source of Funding advantage

Certain banks such as DBS may have a larger depositor base and larger

sources of cheap funding given that many Singaporeans grew up with a

POSB savings account.

Therefore in order to compare Singapore home loan, the safety and

solvency of the bank is not of critical concern, unless there is a risk of them

recalling your loan.

What should property buyer compare?

The best safety in our opinion is that home buyers, property buyers, property

investors should exercise caution and not go into excessive leverage. If they

are not in excessive leverage, even in the case where a loan is recalled by a

bank that is going under, there will most likely be other banks willing to take

over if your debt to asset ratio is low.

What should the careful property buyer do?

Therefore we emphasize that safety should start from the time you buy your

property and structure your home loan financing. Praying for, a bank to be a

SAFE bank should be a secondary concern.

So how to compare Singapore Home loans?

Therefore when doing Singapore Home loan comparison, focus on a home

loan meeting your personal requirements and cash flow needs and give

yourself that safety net.

For Singapore home loan refinancing, it is the same case.

This principle applies to Singapore home loan and mortgage refinancing as

well.

You cannot control how safe a bank will be, but you can control how safe

you want to be.

We are Property Buyer Mortgage Consultants

We help people to compare singapore home loans for refinancing and new

home loans.

ABOUT US Contact us

Tel: 6100 – 0608 sms: 9782 – 8606