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Tuesday, June 26, 2007

Transparent interest rate on home loans

Hi Mr Tan

What are your views about the "transparent" interest rate charged by DBS Bank on their home loans? It seems to be slightly higher than the interest rate of other banks. As the interest rate moves with the interbank rate, will I have to pay more, if interest rate goes up?

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REPLY:

I prefer a transparent interest rate. The rate charged by DBS is based on a interbank rate, plus a premium of 1.25%. I think that this is a fair rate.

It is better to have a transparent rate. This ensures that you will get a fair rate, even if you do not monitor it closely.

There were news reports that some banks adopt many tranches of board rates previously, and may be overcharging some customers, who do not monitor the rate closely.

It does not matter that the interest rate may move up or down with the market. Over the years, this will average out. It is more important that you arrange with the bank for the following:

* keep the same monthly payment, even if interest rate goes up
* flexibiilty to make early repayment, if you have the cash.

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