Home loans cheap, but until when?
MANILA, Philippines - Banks have slashed their home loan rates to as low as 5.75% as a property boom continues and Filipinos look for affordable home financing. But with inflation rising and the central bank certain to hike its key rates, clients who subscribe to initial ultra-low payments -- fixed for a year but due for repricing for the rest of the borrowing term -- may be in for a surprise.
HSBC was among those that started the trend of very low home loan rates, first offering 5.88%, then reducing this to 5.75%. East West Banking Corp. and Robinsons Bank Corp. are also offering a 5.88% repayment rate, down from 7.5% and 6.88%, previously. These are good for a year, after which a repricing will be made based on prevailing market rates.
Last year’s low rates, a huge housing backlog and a property boom fuelled by remittances from abroad have all combined to push competition among banks to fever pitch.
"There is strong demand and growth in home ownership. Our home loan products and rates are targeted to make the initial period of taking a home loan easy for customers to handle," Ron Logan, HSBC senior vice-president and head of personal financial services, told BusinessWorld in an e-mail.
Jacqueline S. Fernandez, EastWest Bank executive vice-president and head of the consumer lending group, said in a separate e-mail: "High consumer confidence, high remittances from overseas workers and the single-digit inflation and interest rates told us it was the right time to expand our mortgage loan portfolio aggressively."
The bank, said Ms. Fernandez, was able to cut its home loan rate because of the low cost of funds, referring to the low interest it was paying on deposits.
Meanwhile, Robinsons Bank Corp. executive vice-president and head for operations Angelito V. Evangelista said, in another e-mail: "We are using the volume strategy to generate business ... We [want to] offer the most up-to-date, competitive and market-driven quality products to our clients".
Banks that did not cut home loan rates, meanwhile, warned that repricing might work against clients’ interests with consumer prices beginning to climb. Inflation rose to 4.3% in February, the fastest uptick since May 2010. It was generally low and stable last year, averaging 3.8%, well within the central bank’s 3.5-5.5% target.
With consumer prices rising at a faster clip, the Bangko Sentral ng Pilipinas has signalled it would begin adjusting its rates, which have been left untouched at 4% for overnight borrowing and 6% for overnight lending since July 2009, in order to keep inflation within the 3-5% target.
BPI Family Savings Bank President Jose Teodoro K. Limcaoco, in an interview, said: "Clients should understand the risks they are taking. Interest rates are going up. If [a client] goes for a one-year fixed interest rate, he or she could be in for a surprise a year from now..."
Philippine Savings Bank President Pascual M. Garcia III, for his part, said in a text message: "The low rates should benefit borrowers at least for a year. They, however, risk getting re-priced at a much higher rate after a year." A higher rate might make it difficult to service the debt, he added.
Nestor V. Tan, president of Banco de Oro Unibank, Inc., agreed."It’s hard to tell [what the prevailing market rate will be at the time of a clients’ loan anniversary]. Nobody can predict interest rate movements with certainty," Mr. Tan said in a text message.
"As rates move up, monthly payments move up and affordability gets affected. The probability is, monthly payments will increase after a year."
Lizette Margaret Mary J. Racela, Rizal Commercial Banking Corp. Savings Bank first vice-president, said in an e-mail: "the low home loan rates are beneficial to consumers, but what is important is that the borrower’s financial capacity is evaluated [by banks] to also consider situations such as possible increases in market rates..."
The latter banks’ rates are higher than 7%. For BDO, its one-year home loan rate is 7.88%; PSBank’s one-year rate is 8.5%; BPI Family’s rate is 8.75%; and RCBC Savings’ at 8.75%.
Mr. Limcaoco, however, pointed out that "if [a housing loan client is] comfortable with the low rate and he or she believes that rates are not going to go up significantly [after a year,] then by all means fix for one year because they are very low."
Philippine National Bank president Eugene S. Acevedo, meanwhile, took a more cautious tone, saying in a text message: "Borrowers must assess the possibility of higher rates by the time of their loan anniversary, regardless of their loan’s tenor". He also pointed out that "a borrower who fixes his loan rate for 10 years also needs to consider that the rates might stay low or not rise to the levels implied by the currently high fixed rates."
PSBank’s Mr. Garcia claimed banks hardly earn with rates this low. "The ... rate for the first year is lower than the cost of funds and operating costs. So [this] is a loss for the first year at least."
Ms. Fernandez at EastWest Bank acknowledged the low rate was not ideal. "The rate is very low that a bank can’t sustain it without sacrificing profitability," she said. "So the low rate is really used as what we call a ‘teaser rate’ to entice entry of borrowers to the bank."
A bank could also compromise its asset profile, BDO’s Mr. Tan noted.
"Non-performing loans (NPLs) tend to get affected if rates [are re-priced] because borrowers have to pay higher rates after a year and some borrowers may have difficulties coping with higher monthly payments," he said.
In response, RobinsonsBank’s Mr. Evangelista said, "banks ensure their NPL ratio does not unduly rise by conducting a very rigid and thorough credit evaluation of borrowers and only after they have passed the credit processes will they qualify for a loan."
The NPL ratio is the proportion of soured loans to total loans. Latest central bank data showed that universal and commercial banks’ NPL ratio fell to 2.88% in December, the lowest since the 1998 Asian financial crisis. The NPL ratio of thrift banks, meanwhile, was at 7.93% as of June from 7.47% a year earlier.
Economists interviewed by BusinessWorld, meanwhile, said the higher home loan take-up sparked by the low rates should sustain economic growth -- which averaged 7.3% in 2010.
Mitzie Irene P. Conchada, an economist at the De La Salle University, said "the bank’s low one-year home loan rate offer is basically to attract borrowers and an effort to encourage borrowing from the private sector to boost economic activity..."
Victor A. Abola, economist at the University of Asia and the Pacific, said banks were being driven by competition. "The re-pricing provision is to ... allow [banks] to earn a higher rate after a year," he added.
Ms. Conchada said repricing could still end up against a bank. "If the re-priced interest rate is lower than the prevailing market rate then it benefits the borrower but not the lender."
"The opposite happens if the re-priced interest rate is higher. [But if higher interest rates prevail,] there is a possibility for banks to incur [an increase] in their delinquent accounts," she added.
For Mr. Abola, "In the final analysis, the borrower should look at the total interest rate ... Some banks offer five-year fixed rates. That may be a better alternative, because at present, rates are being driven up by inflationary expectations."