Mortgage loans : Pending Rate Pains

Lending rates are expected to rise in the near term.

So those who has taken mortgage loans at 'friendly' rates must ready themselves to pay more very soon. You now have to back-pay the 'benefits' you were offered in the past in terms of lower interest rates.[Talk about an Indian Giver!]

The whole property and banking sector are anticipating this raise increase. Banks particularly are positioning themselves for a gradual increase in the rates for their long-term loans.

The monthly statistical bulletin released by Bank Negara for September showed that average lending rate (ALR) was 4.91% compared with 4.9% in August and 4.96% in July. The average base lending rate (BLR) remained unchanged at 5.51% as at Oct 15.

According to UOB Kay Hian Research’s latest update, one of the first loan segments to be impacted would be mortgages. The report said that financing for the purchase of residential properties, which comprise 27% of total loans in the banking system, would likely slow down due to the re-introduction of real property gains tax as part of the measures under Budget 2010.

Mortgage growth would also take a temporary adjustment due to a rise in effective lending rates as banks lowered their mortgage spreads, the research house added.

“Our market survey shows that mortgage spread has been reduced from the previous BLR minus 2%-2.3% to BLR minus 1.6%-1.9%,” the report said.

The rate increase was expected to mitigate the slower loans volume growth, the research house added.

“In this scenario, Public Bank would benefit the most from its strong loans growth supported by its strong branding and lower cost of funding,” the report said.[What about the others?]

An analyst with another brokerage said he had heard reports of the rise in effective rates recently but declined to comment further. Banks, when contacted, declined comment on this matter.

Banking data for September continued to show strong credit demand from the household sector, leading to total loans growth of 7.2%.

Loan applications in the household sector amounted to RM23.2bil in September, compared with monthly average of RM22.8bil in the preceding eight months to August.

UOB Kay Hian Research noted that robust approvals in the six months to Sept 30 would sustain strong loans growth in the fourth quarter of this year and the first quarter of 2010.

“However, potential slower property sales and credit card demand due to the new budget measures would likely lead to slower loans growth in the second half of 2010,” the report said.

The research house, however, maintains its “overweight” call for the banks as slower growth would be mitigated by the increase in effective lending rate.

I am wondering why this “overweight” call?

Isn't it possible that the volume of potential new mortgages may shrink to such an extent that the increase in effective lending rate may just not be enough to off set this shortage?