DBS launches special interest-only mortgage

Aug 7, 2008
DBS launches special interest-only mortgage
Bank says borrowers will then have more cash to seize other
investment chances
By Grace Ng, Finance Correspondent

DBS Bank has launched an unusual mortgage product allowing savvy
customers to take advantage of cheap borrowing costs and free up cash
for investment opportunities.

The bank is offering customers the option of paying only the interest
for the entire duration of their home loan. They pay the principal
amount in a lump sum only at the end of the loan term.

This means they have extra cash for investing - money that would
otherwise have formed the principal component of the loan repayments.

This product is the first of its kind, claims DBS. Currently, banks
allow customers to pay interest only on a mortgage for up to three
years.

The new product has raised some eyebrows among market players who
note that this package is controversial as it may encourage imprudent
borrowing.

Mr Koh Kar Siong, DBS' head of consumer deposits and secured lending,
said the new mortgage is aimed at savvy investors.

'This product allows customers to have cash on hand so they are ready
to seize any investment opportunities available in the stock market
or in other asset classes.'

Businessman A. Lin, 54, likes the idea of using an interest-only
mortgage to 'finance a very good investment property for perhaps four
to eight years, while ploughing the free cash into alternative
strategies like hedge funds'.

But for the general home owner, it makes more sense to pay down loans
now, said Mr Bryan Ong, of mortgage consultancy bcgroup. com.sg.

This is because the three-month Singapore Interbank Offered Rate
(Sibor) is at a four-year low of 1 per cent. So a larger part of your
instalment would go towards repaying the principal sum.

DBS' interest-only mortgage charges 1.5 per cent on top of either the
three-month Sibor or 12-month Sibor.

The cumulative interest payment on this mortgage will be much higher
than the interest paid on a regular home loan because the principal
sum is not reduced.

But Mr Koh noted that this mortgage has features to ensure customers
are not overstretched. They can borrow only up to 70 per cent of the
property purchase price. This will be cut to 50 per cent after 10
years - so the product is only for customers with deep pockets who
can afford a large down payment.

Mr Koh said the product may attract 10 per cent to 15 per cent of
customers looking to take up a new home loan or to refinance their
loans.

Other banks may not follow suit. United Overseas Bank's head of
loans, Mr Kevin Lam, said an interest-only mortgage 'is an
interesting idea but it is likely to appeal only to a niche group of
customers'.

'We take a prudent approach when offering interest-only mortgages by
looking at the customer's profile and ability to pay both the
interest and principal,' he said.

'If a customer fits the right profile, why not offer a loan on a
valuation of 80 per cent? But in general, most customers prefer to
pay off their mortgages.'

Standard Chartered Bank (Stanchart) said it 'offers interest-only
mortgages upon customers' request and on a case- by-case basis for
customers in exceptional circumstances, such as those with short-term
cash flow problems'.

Mr Dennis Khoo, general manager of lending for Stanchart, said: 'We
advise customers to exercise prudence and to be well-informed when
selecting a mortgage, so that they would not be over-leveraged.'