Can Citibank unilaterally increase SIBOR loan’s spread? (2) – ST article - Borrowers upset over hike in margin for Sibor loans

Subsequently a better written news of this has been published in The Straits Times: 

“Borrowers upset over hike in margin for Sibor loans

Monday, Mar 30, 2015
Rachel Boon
The Straits Times

MANY home buyers with loans pegged to the Singapore Interbank Offered Rate (Sibor) have been hit with higher repayments following the Sibor's increase this year.

That is to be expected, but some Citibank customers have also found that the margin or spread - the added percentage banks tack on to the Sibor - has also moved up.

They were informed earlier this month that the spread on their Sibor-pegged loans would increase to 0.85 per cent from the promotional rate they had signed up with. The change takes effect from April 1.

Citibank said the spreads range from 0.6 to 0.8 per cent for customers who took up loans in late 2010 and in 2011.

One customer said he has been on a three-month Sibor loan since 2011 under a two-year lock-in package. His spread has risen from 0.7 per cent to 0.85 per cent.

However, Citibank said raising the spread has affected only a small number of people.

Mr Peng Chun Hsien, Citibank Singapore's head of secured finance solutions, also stressed that the "current revision is only applicable to clients outside the lock-in period".

Another customer, a Mr Lee, said he has been on a one-month Sibor home loan since 2011.

He told The Straits Times his spread has risen from 0.65 to 0.85 per cent but he had thought the spread would stay at 0.65 per cent throughout the loan.

Mr Peng told The Straits Times: "The word 'throughout' is a term the industry uses, and refers to the tenure and period that we are covering."

.......................................................

Another client on a one-month Sibor said: "Sibor is already variable and has gone up by 100 per cent year on year. How can the spread be variable too?"

Finance industry experts say reviewing spreads is standard bank practice, but in practice, changing the spread during the loan period is uncommon.

The Straits Times understands that banks such as United Overseas Bank and OCBC Bank have not increased the spreads. A DBS Bank spokesman said DBS and POSB have not varied spreads while under an existing agreement with customers. He said an 0.85 per cent spread used to be the market rate but some banks have lowered it to attract customers.

.........................................

Mr Seah Seng Choon, executive director of the Consumers Association of Singapore, said: "We are of the view that the banks should justify such rate changes clearly to the affected consumers. Such changes will not be fair to consumers if there is no justification to do so."

Citibank said it undertook "careful consideration of factors including prevailing market conditions" before making the move.

The Monetary Authority of Singapore (MAS) said it does not regulate the setting of interest rates but the banks must provide clear and relevant information on products and services, said a spokesman, adding that MAS has asked Citibank to review the customer feedback received.

....................................“

In online forum at CondoSingapore.com, 
some forumers had also voiced out that they had been affected by Citibank’s unilateral action. 

Several forumers there believed that Citibank’s arguments to ST journalist’ request for comments on the case is weak, and is pushing the limits of interpretation, and they felt that Citibank is just being despicable and acted against their contractual agreement.

The ST newspaper journalist had approached MAS and CASE for their response and as can be seen by the news reported, and apparently MAS and CASE are both unwilling to do anything about other than just talk only. In the online forum, a forumer has commented about his/her friend being affected and updating on his purse with Citibank: 

“He told me he is in touch with a Straits Times reporter who is "researching" this case. Also, MAS replied to him saying it is instructing Citi to officially respond to him. However according to him, MAS said it had no power to do anything and told him to go FIDRec if he is not satisfied with Citi's response/explanation. 
I personally found it unacceptable the authority did not take the stand of helping consumers to fight the bank. Although I am not surprised: the IB CHF case, MAS also said cannot do anything; even in Lehman note case, DBS customer in HK got better compensated than DBS customer in Singapore because the regulator in HK forced all the banks to compensate.”

Can Citibank unilaterally increase SIBOR loan’s spread?

Recently, I stumbled upon a case where a bank (Citibank in question) over-rule their agreed terms in their main contract agreement to raise the supposedly fixed loan spread (or loan margin)! 

The issue is like this: In the contractual mortgage agreement that has been signed, the interest rate was stated to be something like “SIBOR + 0.70%”, and then Citibank unilaterally changed the fixed “0.70%” to something like “0.85%” (or more)! Usually, we call this “0.70%” figure to be the loan spread or loan margin and I believe almost all of us think that if the figure has been specifically spelled out in the mortgage contract, it should be fixed at “0.70%” through the loan tenure right? But Citibank doesn’t think so! They said they have the right to change this “0.70%” fixed figure! 

So, the pertinent question here is: Can banks (like Citibank) legally do this?

You can read lots of heated discussions here:

It runs on for 38 pages! I have a keen interest on this issue and have managed to read all 38 pages, so I think I may as well summarize as below (I will break into several posts as it is too long in one!):

You can see this news about Citibank at this webpage at this URL (in Chinese)…

“2015年03月16日

部分银行调高浮动利率配套息差

胡渊文

随着本地基准利率上扬，有银行调整了浮动利率配套的息差（spread）。

　　花旗银行日前通知现有客户，他们的房屋贷款SIBOR配套息差调高到0.85％（SIBOR+0.85％），据了解，一些客户原本的息差是0.70％（SIBOR+0.70％）。

　　SIBOR是新元拆息率，指的是银行同业之间的借贷率。

　　银行贷款的条款中允许银行调整利率，但几家受访的银行均表示，还未调整过SIBOR配套的息差。

　　星展银行和渣打银行表示至今没有调整过。据悉，大华银行也从未调整过。

　　花旗银行表示，上述的调整只有一小部分客户受到影响，银行是基于和客户的整体关系来进行评估，并给予客户足够的通知期。

　　一名业内人士说，花旗银行调整息差，可能是反映了银行的商业成本。她说，新元银行同业拆息率是银行之间借贷的成本，是透明的，如果银行要赚取更多收入，只能调整息差。

　　另一名银行业人士说，银行有权这么做，但通常不会调整现有客户的息差。

　　本地经济师宋生文说，银行这么做可能是因为目前的利率环境特殊，要考虑到接下来更大的波动性。

他说，本地的基准利率应该是和美国利率挂钩，但由于担心美国加息以及其他地区的经济情况，本地的利率率先走高了。”

The Google Translation is as follow:

“2015-03-06

With the local benchmark interest rate rise, banks adjust the floating rate matching spreads (spread).

Citibank recently notify existing customers, supporting their mortgage SIBOR spreads increase to 0.85% (SIBOR + 0.85%), it is understood that some customers had interest margin is 0.70% (SIBOR + 0.70%).

SIBOR is SGD interbank rate refers to the borrowing rate between the interbank.

In terms of bank loans allow banks to adjust interest rates, but several banks surveyed said yet adjusted spreads SIBOR supporting.

DBS Bank and Standard Chartered Bank said that has not been adjusted. It is reported that UOB has never been adjusted.

Citibank, said the adjustment is only a small part of the affected customers, the banks and the overall relationship is based on the customer to evaluate and give customers adequate notice period.

An industry source said, Citibank adjust spreads, probably reflecting the bank's cost of doing business. She said SGD interbank interest rate is the cost of borrowing between banks is transparent, if the banks want to earn more income, only adjust interest rate differential.

Another banking source said, banks have the right to do so, but usually do not adjust existing customer spreads.

Local economist Songsheng Wen said the bank may do so because of the current interest rate environment, special consideration to the next greater volatility.

He said the local benchmark interest rate and US interest rates should be linked, but the fear of the US economy to raise interest rates as well as other areas of local interest rates will move higher.“

It seems that this Chinese newspaper’s reporter/journalist had terribly missed the crux of the issue, which has been highlighted here: 

“Haiz this reporter is extremely useless. He failed to mention the most critical part : citi sold the mortgage as "throughout spread", and yet it changed it ! This report made it sound like bank adjusting spread is a normal business , and yes, as teddy put it, almost like bank adjusting spread is "normal", not adjusting is doing customer a favor ! It should have highlighted the fact that citi did not honour the term !

The most ridiculous part of this report is this : "as SIBOR is transparent fixing rate, bank cannot adjust this rate, so bank has to adjust the spread". SIBOR being transparent is the exact reason why customers take up SIBOR packages, so the bank CANNOT anyhow change its reference rates ! If a bank can change the rate no matter what, then it might as well dun sell any number, just simply say "the mortgage rate shall be whichever number we think reasonable". And see if citi can sell any mortgage with that !”

I think CASE is not sufficient. It's the MAS that should step in. This is public interest. Citi cannot be allowed to set such precedent. No other bank has ever done this.

In fact it is also unfair to other banks. Citi effectively attract customers from other banks by, effectively cheating. Although I can imagine other banks will love to see this incident go unnoticed, so they can feel free to do the same next time.“

How much does a person really need to have a comfortable retirement in Singapore?

“How much does a person really need to have a comfortable retirement in Singapore?” – I believe this is something that most Singaporeans would like to know and to have, a comfortable retirement (not luxury) life-style which most Singaporeans would deem to be pretty good enough for them!

According to Singapore’s household income statistics 2014 (from http://www.singstat.gov.sg/), your household would be in top 20% household earnings if your household income is about $14500 and above.

Also, according to Singapore’s household expenditure statistics 2013, household with that kind of income spends on average about $7000 per month. However, this $7000 pm figure includes spendings on kids and/or parents, so I would say a figure of $6000 per month for the couple’s retirement would allow them to maintain their comfortable life-style.  However, this is not to say that you can simply imply $3000 pm to be sufficient for 1 single individual for a comfortable life-style because the pooling of resources for 2 actually makes many things cheaper, hence to achieve a comfortable life-style for a single individual should be higher than $3000 pm (in contrast to a couple just needing $6000 pm).  Note that the $6000 pm should exclude costs of lodging (which should be $0 if the couple own their property they are living in and have fully paid up for the property with no property loan debt).

CPF Life Payout-Return Calculator Online

I have made available here a “CPF Life Payout-Return Online Calculator“ where you can calculate the payout you are supposed to receive based on the expected annuity return you desire (which should be 4% according to CPF) if you can live to certain age!

You can access the calculator online at this URL:
    http://make-money-secrets.blogspot.sg/p/cpf-life-payreturn.html

(You can also access from the link here:
https://make-money-secrets.blogspot.sg/p/my-online-calculators.html )

Note that there are 2 ways to use this CPF Life payout-return online calculator:

(a) You can compare the CPF Life payout you ACTUALLY receive to the CPF Life payout at desired return (calculated using this online calculator) to see whether you are being over-paid or under-paid for your participated annuity (based on the average life-span for men (80) and women (85)) if you key into "Age you expected to live until in (Years)" as 80 (for men) or 85 (for women).

(b) You can keep varying the input number of "CPF Life desired return you would like (%)" such that you get a % figure which gives a CPF Life payout (given by "CPF Life payout at desired return") which is same as the ACTUAL CPF Life payout amount. In this way, the % figure basically gives you the implied annuity return of your CPF Life (for a given "Age you expected to live until in (Years)", which we usually use 80 for men and 85 for women (this is the actual statistical life-span of Singapore's men and women).

This is for fun but the truth will shock you!

For example, if you have participate in the CPF Life Standard Plan’s Full Retirement Scheme (previous called the “Minimum Sum”) with an amount of $161,000 at 55 years old, then accordingly, you should get about $251,371 at 65 years old (after interest compounding).
Then from 65 years old,  CPF Life payout given by CPF which is about $1300 per month (for men), and if you project that you can only live till average age of 80 years old (80 for men (85 for women), because statistically only <=50% of Singaporean men can live pass 80 years old and similarly for women is 85 years old) and assuming bequest = $0 if you live till/pass average age (which is typical of such annuity programme), then the actual CPF Life annuity return you are getting is actually -0.88% (a NEGATIVE return)!

In other words, if a man wanted to get an annualized return of 4% from his CPF Life (with a capital of about $251,371 at 65 years old), he would need to live till 91 years old!  Think about it, how many Singaporean men out there can live till 91 years old?  I would postulate that chances are that only something like 1% of men would ever live pass 91 years old, while the statistics currently available, which you can read here:
    http://www.singstat.gov.sg/statistics/visualising-data/charts/life-expectancy-at-birth

It is clear that about 50% of men would die before they even hit 80 years old, and hence 50% of men would only have a CPF Life annuity return of -0.8%!

It would be interesting to know how many men actually could live pass 80 years old, 85 years old and 91 years old!

CPF Life – Actual CPF Life’s annuity return you are getting…

What is the actual annuity return you are getting if you can live till the average age of 80 for men (or 85 for women)? Is it 4%, 2.5%, or even negative?

Holy cow! Seems like nobody can give you a reply or the relevant personnel in the know refused to acknowledge this question and/or refused to answer this question for all to hear?

Fret Not!  You can easily find out the truth now by using the calculator I have here where you can calculate the payout you are supposed to receive based on the expected annuity return you desire (which should be 4% according to CPF) if you can live to certain age!

You can access the calculator online at this URL:

    http://make-money-secrets.blogspot.sg/p/cpf-life-payreturn.html

(You can also access from the link here:

https://make-money-secrets.blogspot.sg/p/my-online-calculators.html )

Note that there are 2 ways to use this CPF Life payout-return online calculator:
(a) You can compare the CPF Life payout you ACTUALLY receive to the CPF Life payout at desired return (calculated using this online calculator) to see whether you are being over-paid or under-paid for your participated annuity (based on the average life-span for men (80) and women (85)) if you key into "Age you expected to live until in (Years)" as 80 (for men) or 85 (for women).

(b) You can keep varying the input number of "CPF Life desired return you would like (%)" such that you get a % figure which gives a CPF Life payout (given by "CPF Life payout at desired return") which is same as the ACTUAL CPF Life payout amount. In this way, the % figure basically gives you the implied annuity return of your CPF Life (for a given "Age you expected to live until in (Years)", which we usually use 80 for men and 85 for women (this is the actual statistical life-span of Singapore's men and women).

This is for fun but the truth will shock you!

For example, if you have participate in the CPF Life Standard Plan’s Full Retirement Scheme (previous called the “Minimum Sum”) with an amount of $161,000 at 55 years old, then according to the CPF Life payout given by CPF which is about $1300 per month, and if you project that you can only live till average age of 80 years old (for men; 85 for women – statistically only <50% of men can live pass 80 years old and similarly for women is 85 years old) and assuming bequest = $0 if you live till/pass average age (which is typical of such annuity programme), then the actual CPF Life annuity return you are getting is actually -0.88% (a NEGATIVE return)!

I think the above truth should call for more transparency from CPF regarding the actual annuity return of CPF Life and the amount of unpaid accumulated reserves (aka profits made by CPF) instead of treating CPF Life’s financial account as a secret!

Earn more and spend less on investment expenses (explicit & non-explicit)!

Similar to the concept of "Save more and spend less on your income", a person should also ensure that he/she "Earn more and spend less on investment expenses"! This is also another very important concept to make more money! This is why I hate to invest in Unit Trusts / Mutual Funds and investment-linked insurance policies! These types of investment instrument have very high expenses (they are non-explicit, charged to the account and you don't see them!). Just give you an example, a unit trust (UT) manager is able to earn market returns of say 8% a year over 10 years. However, the management expenses come out to be about 3% a year (yes, that is the kind of UT expenses you are looking at in Singapore!). Therefore, your actual net return is only 5% per year. To see the significance, I assume you put in $240,450 into the Unit Trust for 10 years (let's just make the figure about the same as what you will get at 65 years old when you contributed CPF minimum sum of $155,000 at 55 years old): At 8% compounded return a year, at the end of 10 years, you should get back $344,044. At 5% compounded return a year, at the end of 10 years, you should get back $255,286. So, the 3% annual management expenses actually costs you to lose $88,758, which is almost (88,758/155,000) = 57.3% of your original capital!