Mortgage customers up in arms over CIMB's floor rate hike

CIMB Singapore has raised the ire of customers with its move to raise the floor of certain mortgages pegged to the one-month Singapore interbank offered rate (Sibor) - with that floor rate now higher than the prevailing market rate.

From May 18, customers on CIMB's floating-rate mortgages linked to the Sibor or Swap Offer Rate (Sor) must stomach being charged a minimum of 0.9 per cent, compared to the previous floor rate of 0.1 per cent, a notification letter seen by The Business Times showed.

Disgruntled customers told BT that they consider the move "highly unethical" and intend to challenge the bank on the decision. CIMB is believed to be the first bank to increase its floor rate for such floating-rate mortgages amid the Covid-19 pandemic, with most banks keeping the floor rate of about zero. Floor rates are understood to protect lenders from losses, and introduced as a clause in loan contracts in the case of a collapse in rates. For example, in 2011, the Sor turned negative.

With a floating-rate mortgage, customers are charged based on the benchmark rate, as well as the accompanying spread. If the benchmark rate turns negative, banks protect themselves by keeping to a minimum floor rate.

Most of the mortgage loans sold by CIMB here are linked to the 1M-Sibor. The issue is that the 1M-Sibor rate as of April 24 is at 0.75 per cent, below CIMB's new floor rate of 0.9 per cent.

In response to queries from BT, Victor Lee, CEO of CIMB Bank Singapore, said that the adjustment of floor rates was deemed necessary after its internal review of the funding structure of the bank. "Our loans are funded by the bank's deposits," he said in a statement. "CIMB Bank has continued to keep our current and savings deposits interest rates high in a declining interest rate market and, as such, some alignment to the funding structure was needed."

With the revised floor rate of 0.9 per cent, the interest rate of its existing floating rates mortgage loans range from one per cent to 1.15 per cent for the first three years, and 1.5 per cent for the fourth year onwards.

"Customers can also choose another package that suits their needs with the assurance that we will not impose any lock-in cancellation or redemption fee should they not wish to continue with their loan with this revision," he said.

"Also, should our funding cost decrease, the bank will look at lowering the floor for our Sibor and Sor rates accordingly."

However, the notification letter sent out to customers contained no such details. Customers told BT that they had not received any explanation from the bank either.

Instead, the notification letter from CIMB said that the change of rates is governed by a Clause 5 in the terms and conditions which states that the bank has the discretion to change interest rates any time.

Mortgage brokers who spoke to BT on the condition of anonymity said that they have also received customer complaints on CIMB's latest move.

Raising the floor rate is "highly unusual" and "likely to upset customers" as banks usually do not flippantly change their rates for fear of backlash, they pointed out. But they acknowledged that by that clause, banks can technically change their rates.

There is the possibility that other banks might follow suit with CIMB's example, but they must weigh the cost of losing customers' trust especially at a time like this when they should be seen as being supportive, one mortgage broker added.

Edward Ti, assistant professor of law, Singapore Management University, concurred that CIMB's move "appears at odds" with the recent relief measures announced by the Monetary Authority of Singapore (MAS) to grant mortgage borrowers relief, in light of the Covid-19 situation.

From April 6, all banks and finance companies here must allow deferments through to the end of the year of either principal repayments or both principal and interest payments of qualifying mortgages.

"In a floating rate mortgage, the bank, like the borrower, must take the rough with the smooth as both parties have agreed to contract pursuant to an external, objectively observable barometer," noted Mr Ti.

Seeking to set the Sibor floor at 0.9 per cent suggests a case of "buyer's regret" on the bank's part, he added.

In response to queries by BT, an MAS spokesperson said: "Banks set the interest rates for mortgages as they bear the risks of lending. MAS requires banks to explain to customers the circumstances under which they adjust the reference rate or spread for floating rate mortgages."

Vivien Shiao