I am still servicing my housing loan with an established foreign bank. Previously, this bank used to have a very attractive way of calculating my loan interest. It worked this way - I deposit my excess savings in a 'check-and-save' account. The monthly balance that I maintain in the account will be deducted from the loan principal before the monthly loan interest is calculated. For example, if I have a $300,000 housing loan and I have $240,000 savings in my account, I effectively pay loan interest only on $60,000, i.e. $300,000 - $240,000.
However, everything changed in October last year. The bank introduced a 'novel' (read profitable) way of calculating loan interest. With immediate effect, only 2/3 of my savings could be used to offset the loan principal for the purpose of calculating the loan interest. For the balance of 1/3 of the savings, the bank pays only a measly 1% interest which they claim 'is still higher than what most banks are paying'. Some consolation.
Many of the bank's customers, including yours truly, were caught unaware. Because of the recent property boom, some had signed up for a housing loan with the bank only a few months ago. Within that period, the interest rate, being a floating one, had been revised upwards a few times. As for me, I restructured my loan with the bank in early 2006. I had to pay more than $500 in administrative charges then. Immediately after the restructuring, I was enjoying a low loan interest rate of 1.6% p.a., but not for long. Now, only one year later, I am paying a hefty 4.55% p.a., almost a 3-fold increase.
To add insult to injury, the bank slapped us with the new way of calculating loan interest which was obviously aimed at squeezing even more money out of us. I have calculated - I am now effectively paying almost 6 times more interest compared to what I was paying early last year. Let's rework the sums using the same example above. With the new method of calculation, I can only offset 2/3 of my $240,000 savings or $180,000 from the loan principal of $300,000. This means that I have to pay interest on $120,000 instead of $60,000 previously, a two-fold increase. Coupled with the nearly 3-fold increase in interest rate, I am paying almost 6 times the original interest amount. This is simply ridiculous!
A few letters of complaint written by irate bank customers were published in the forum pages of our mainstream newspaper in October 2006. The bank replied, explaining that because of the rising interest rate environment, it had to raise interest rate for housing loans. It also refused to budge regarding its new way of calculating loan interest. It even tried to convince us that customers 'do not end up paying more interest than before'. What crap! Does the bank think that all of us failed our Primary School Maths?
Because of the above developments, I was at the Tampines Branch of the bank last Saturday to find out if would be worthwhile for me to redeem part of my loan using CPF funds. (CPF is paying me only 2.5% interest while the bank is charging me 4.55%. However, I have to pay 1.5% in penalty charges since my loan is still within the 2-year lock-in period.) As if to rub more salt into the wound, the 'Relationship Manager' who served me gave me extremely poor service despite the fact that I am a 'Priority Banking' customer.
(To be continued)