Bank’s rationale behind home loan rates

I REFER to Mr Toh Hai Joo’s letter on Monday, ‘Home loans: No interest savings despite falling market rates’.

We thank Mr Toh for his feedback and would like to clarify that under a Variable Rate Home Loan Package, interest rates are generally tiered over the first two to three years with the interest rate for the first year being lower than the later years, and in some instances, lower than the prevailing interbank interest rates.

Hence, an interest rate increase may be due to tiering up of the interest rate as part of the two- to three-year package deal and not due to Board Rate increases. The offer of lower first-year interest rate followed by tiering up of interest rates in the next years is, in part, to assist the customer in his cashflow management and, in part, a function of how Variable Rate Packages are structured.

Board Rate adjustments, if any, are made after taking into consideration various factors such as the interest-rate environment when the loan was first taken up, the prevailing rate environment, market dynamics, as well as the costs in carrying the loan. Market interest-rate trend is one of several factors that determine any Board Rate adjustments.

We have since contacted Mr Toh to address the issues he had raised.

Gregory ChanHead, Consumer Secured LendingOCBC Bank

Source : Straits Times - 9 Jan 2009