Higher home loan rates imminent

KUALA LUMPUR: Housing loan rates are expected to trend upwards in the not-so-distant future as the banking industry moves towards risk-based pricing in determining interest rates that are more sustainable for the industry.

EON Bank group chief executive officer Michael Lor said besides the change in risk calculation, the recovering economy would increase demand for credit and push up interest rates.  

“The pricing war among banks earlier this year has brought housing loan interest rates to a level that is below the cost of funds and is not sustainable.

“Given the recovering economy and housing market, we see that interest rates for housing loans are slowly being revised upwards, although no one can predict when the rates would be revised,” Lor said after launching EON Bank’s Super Easi 123 Home Loan here on Nov 3.

Average lending rate (ALR) rose to 4.91% in September from 4.9% in August. The current average base lending rate (BLR) is 5.51%.

Lor said housing loan interest rate was “generally trending up as banks begin to move into risk-based pricing by measuring the risks and cost of their products as well as the implementation of the FRS 139 framework”. He added that higher rates were inevitable, a sentiment shared by many industry analysts and economists.

Financial Reporting Standard (FRS) 139, which is set to be effective in Malaysia from Jan 1, 2010, refers to the accounting regulation titled “Financial Instruments: Recognition and Measurement” that requires the valuation of financial instruments on a fair value basis versus historical cost.

Under a risk-based pricing methodology, banks may charge borrowers different interest rates based on factors such as credit score, wages and employment, or offer different rates depending on the type of property.

Banks will attempt to measure risk based not only on the time value of money, but also on the probability of default by any particular home buyer.

Meanwhile, on the impact of the re-imposition of the real property gains tax (RPGT) on the property market, Lor said RPGT was not expected to adversely affect the market, although a knee-jerk reaction could be expected.

“In the long run, this 5% tax on property gains can be priced in when buying and selling properties. The market will realise it is not likely to dampen the recovery in demand.”

With the launch of its latest home loan product, Lor said EON Bank expected to achieve a more than 10% growth in housing loans this year.

As at end-September, EON Bank had achieved more than RM1.5 billion in new home loans, compared with RM1 billion in 2008.

“Our total outstanding housing loans are just around RM5 billion, which is relatively small. This gives us a lot of room to grow, but we have to be more creative in our product offerings and innovate faster than our competitors,” Lor said.

He also said the bank expected to achieve RM200 million in new home loans by January next year from its latest offering.

“In the last two or three months, we saw some positive trends in the economy and it will continue to improve following the pro-business Budget 2010 announced recently. As a result, we can expect business activities to go back to normal, then people will continue to invest and buy assets, especially properties,” Lor said.

He said the home loan segment remained important to EON Bank as consumer lending represented 65% of its total value lending asset.

The new Super Easi home loan offers interest rates that are tied to 12-month fixed deposit (FD) rate plus 1.25%. The prevailing 12-month FD rate is 2.5% while EON’s current BLR is 5.55%. The package is for completed properties worth at least RM200,000.

“Everybody understands what FD is and its interest rate, but not everybody knows or understands BLR,” said Lor, in highlighting the difference between Super Easi and other home loans.

He added that this was the latest example of the bank making a headstart in introducing innovative products to the market.

This article appeared in The Edge Financial Daily, Nov 4, 2009.