Tired of the banks’ complimentary calendars? Next time, ask to visit the mortgage department. It’s so shady in there, you get a complimentary torchlight instead. And even that won’t help because mortgage bankers, like most lesser demons, exude deceit from every orifice. If they blow their nose, the contents of the tissue would be enough to acquit 10 career criminals. But fear not; through asking a lot of annoying questions, MoneySmart has uncovered four of their favourite ploys. Watch for these if you’re getting a home loan!
"That's odd. You usually don't cast a shadow or reflection, Mr. Banker."
Why Do Bankers Get Shady?
Mostly because the home loans market moves in cycles.
Banks take turns “blitzing” the market: Every few months, one or two banks will offer better rates than all the others. The customers then flock to these top banks, while abandoning the others. In another few months, these leading banks will in turn be replaced, and the customers will move on. But at all times, there will be one or two banks with significantly better rates than the others.
The problem for bankers is this: Their commission is based on the home loans packages they sell. And when their bank isn’t one of the leading banks, how are they supposed to sell anything? It’s obvious that the leading banks have a better product.
That’s when the half-truths and misdirection start happening. Such as…
1. Focusing on the First Two Years
"Don't worry about later; everyone knows the world's ending in 2012 anyway."
When a bank’s home loan rates are bad, the bankers try to distract customers. A favourite tactic is to harp on the first two years of loan repayments. Often, these are quite low…perhaps even lower than the leading banks. But there’s a catch:
Come the third year, the interest rate takes a running jump. A rate that stays at 0.8% for the first two years might suddenly become 1.2% on the third year; and the only warning you’ll get is a single letter. Probably sealed in superglue and marked “Totally Not Important, Don’t Bother Opening”. And if you’re making Giro payments, you won’t notice until long after you’ve paid it.
In face to face conversation, the bankers like to emphasize you how little you’re paying for the next 24 months, compared to the other banks. But unless you insist on knowing the third year rates, they’ll treat it like an inbred cousin locked in a cellar: To be discovered only as a nasty shock.
And if you press them on the third year, they’ll…
2. Claim You Can Easily Refinance
So you caught them out; you don’t want to pay a huge amount on the third year.
“That’s fine,” the banker will tell you, “Just stick with us for two years. After that, you can refinance and switch to whatever bank you want.”
Here’s an example of what the banker means, comparing interest rates from two banks:
Year 1 |
Year 2 |
Year 3 |
|
Bank of Ripoff |
0.8% |
0.8% |
1.2% |
Bank of Bull |
0.9% |
0.9% |
0.9% |
Bank of Ripoff is suggesting you pay 0.8% for the first two years, because it’s even cheaper than Bank of Bull. Then at the end of the two years, you switch your loan to Bank of Bull. You get the best of both banks!
But at the end of two years, you approach Bank of Bull, and they’ll tell you: ”The 0.9% package? That was two years ago. You can’t apply for it any more.”
And there goes your plan to refinance.
See, what the Bank of Ripoff won’t tell you is that in two years, the awesome loan package from Bank of Bull might not exist any more. Think about that before swallowing a mortgage banker’s arguments.
Incidentally, the clawback period is three years. Refinance after two years, and you need to pay back the legal fees and fire insurance the bank subsidised.
3. Bad Mouth SIBOR
"SIBOR packages stink…until next January when I'm selling one."
Sometimes, the best home loan packages are linked to the Singapore Inter-Bank Offered Rate (SIBOR). These are published indexes, which determine floating rates. I’ve discussed fixed and floating rates elsewhere; but in a nutshell, SIBOR determines the interest rate of a home loan.
As long as they’re not currently using it themselves, bankers like to claim SIBOR is dangerous. The rates will skyrocket, bankrupt you, destroy your home, and sleep with your daughter. But here’s what they’re not saying:
- SIBOR is more trustworthy than any bank’s internal rate. You can look up SIBOR rates any time, but the bank’s internal rate is private.
- SIBOR does have its up and downs; but a 10 year history demonstrates that most changes are minute, often ranging from 0.1 – 0.4 %. It will not leave you homeless overnight.
- SIBOR is less volatile than the international Swap Offer Rate (SOR). As SIBOR and SOR somewhat match each other’s movements, some bankers try to confuse the two. But SIBOR’s whipsaw motions are less drastic than SOR’s.
Remember that bankers exaggerate the dangers of SIBOR only when other banks are using it. Come back when their own bank has a SIBOR package, and they’ll be singing a different tune. Don’t give in to scare tactics.
4. Using Confusing Maths
"My maths exam was kind of like this. If I'd also worn a blindfold."
The interest rate of a loan is based on the amount of money dispersed. And when you’re buying a property that’s being built, payment is issued in parts. The Progressive Payment Scheme means you don’t pay for a property in full; rather, you might pay 20% after the foundation is laid, another 10% after the structure is raised, etc.
So say you’re buying a condo (under construction) that costs $1 million. In the first year, you’re paying just 20% of the overall cost, which is $200,000. Your loan amount is $200,000, NOT $1 million. If your home loan rate is 0.8%, the interest would be $1600, NOT $8000.
This means that for the first year, a difference of 0.8% and 0.9% is minuscule. It’s $200. Now remember the banks in point 2? When Bank of Ripoff offers a rate that’s 0.1% below Bank of Bull, it’s only saving you $200.
And now, the real kicker: On the third year, you’ll be paying about 80% of the condo’s cost. Your loan amount is thus $800,000. Let’s redo Bank of Ripoff and Bank of Bull’s chart, using dollar amounts:
Year 1 |
Year 3 |
|
Bank of Ripoff |
$1600 (0.8% of $200,000) |
$9,600 (1.2 % of $800,000) |
Bank of Bull |
$1800 (0.9% of $200,000) |
$7,200 (0.9% of $800,000) |
And yes, that’s another reason bankers gloss over the third year; it’s when your loan amount is a lot bigger.
Worried? Get a Mortgage Broker to Help.
If this leaves you nervous or unclear, try using a site like SmartLoans.sg. This website automatically shows the leading home loan packages, so you won’t be one of the strays picked on by a left-behind bank. The site also puts you in touch with a mortgage broker instead of a banker.
Mortgage brokers are independent, and have no loyalty to any particular bank. And with regards to the SmartLoans brokers, their services are free; they receive equal referrals from all 12 banks, and have no reason to misdirect you.
Image Credits:
Smabs Sputzer, danielmoyle, .thana, eeskaat
Have you been on the receiving end of any of these tactics?
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