Loan caps challenge home financing in 2013

BANDAR SERI BEGAWAN - A BOLD move in March this year by the Autoriti Monetari Brunei Darussalam to revise lending and financing rates in Brunei easily became one of the talked about topics in the banking and finance sector. The move, according to the central bank, was to “guarantee savers are rewarded with reasonable returns and to promote savings culture among the public”.

One of the new measures include a revised maximum effective interest rate or annualised profit rate of not more than 4.5 per cent per annum for residential property loans or financing, which had the biggest impact on the industry.

A revised minimum savings deposit rate of 0.15 per cent per annum will now be applicable for new and existing savings.

Many banks adjusted their products to ensure that growth could still be sustainable. A month later, in April, banks such as HSBC started to modify their home loan packages to be in line with the newly revised rates. After a period where home loan applications were frozen, due to the immediate effect of the rates, HSBC then returned with a new repayment period for the loans – shortened to 10 years.

The bank told customers that it would now only finance a maximum 70 per cent of the property’s value, with the customers now having to shell out the remaining amount on their own, as opposed to the previous packages where the bank loaned out up to 100 per cent of the value of the property.

The bank has also taken away subsidies that used to amount to a maximum of $15,000 and included land valuation, insurance and others.

Standard Chartered Bank in April also said that it has restructured its offering. Chief Executive Officer Lai Pei-Si said that subsidies which used to be five per cent of the overall amount have been reduced to three. She said that the bank restructured the subsidy because “the margins have changed”.

“We still finance up to 100 per cent based on a case-by-case basis,” she added, noting that SCB is also adhering to the pricing that was issued by the central bank.

Baiduri Finance in April told customers that its home loan applications are now calculated based on the newly revised rates of 4.5 per cent, which will be a monthly reducing balance.

The bank also said that it does not finance the full value of the property unless the applicant works for the government, adding that financing will be between 80 and 90 per cent of the property’s value, also on a case-by-case basis.

Bank Islam Brunei Darussalam (BIBD) has also revised its home loan package to remove subsidies.

Customers will also be charged separately for products such as fire insurance and others, and customers can now opt to take out a separate personal finance product for these payments.

The repayment period for the home loans at BIBD remains at a maximum of 25 years, and that the bank “can also finance” up to 100 per cent of the property’s value.

In its most recent country assessment report on Brunei, published in June, the International Monetary Fund (IMF) said that interest rate controls by the central bank “might have detrimental effects on the financial sector”.

“The recent interest rate controls imposed by the AMBD could have a negative effect on financial intermediation,” IMF said in the June report.

The chairman of the Brunei Association of Banks, Terence Cuddyre, said in a report published in September that “financial institutions are coping with the new lending and deposit rates imposed by the central bank”.

He admitted that the revised financing and deposit rates implemented by the AMBD had been a “challenge” for several financial institutions. In that same report, he said that several banks were still trying to get used to the regulations and operating based on the capped rates.

“Lending product is a mainstay for most of the banks. So the new regulations that were put in place did put caps on a number of the lending products that were in the marketplace.

“And it has made that a little more difficult to manage from the standpoint of managing a book of loans in terms of the interest rates that we can charge and how rates are reset and so on. So that’s been a challenge for a number of institutions.”

To add on to the list of challenges that the banking sector is facing, the market size has shrunk further, with many home loan products now only made available to Bruneian citizens, where before permanent residents and foreigners were included in their customer segment through the use of Power of Attorney contracts that allowed them to purchase land and property in the country.

Baiduri Finance said in a report in June that if a permanent resident or foreign national wishes to apply for home financing, the bank would approve a home loan if the property comes under the strata title system, whereby it is possible to own an apartment in a high-rise outright for a lease period of up to 99 years.

Under the Strata Title Act 2009, a foreigner registered as the owner of a strata title unit can remain in Brunei even after the expiry of his or her work permit and can use the property as collateral.

However, to date, there are only a couple of properties available to be sold under Brunei’s Strata Title Act.

A representative from BIBD said in June that until it receives confirmation from the Land Department that it could do otherwise, it would not accept applications from permanent residents and foreigners.

Meanwhile, Cheok Fui Say, general manager of retail lending at Standard Chartered Bank (SCB), said the bank would process home loan applications from permanent residents and foreigners “as long as it is under a leasehold or strata title”.

HSBC (B) Sdn Bhd released a statement in the same month saying the bank was still accepting mortgage applications from permanent residents. However, approval would be done on “a case by case basis and within the terms and conditions of the bank”.

The Brunei Times