Mortgage lenders ditch Eibor as base rate

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Lenders are replacing the benchmark Emirates Inter Bank Offer Rate (Eibor) with their own base rates for property mortgages, saying Eibor is no longer a true indicator of their cost of funds.

Three-month Eibor has halved since the start of the year, from 4.362 per cent to about 2.393 per cent by mid-August. Mortgage lenders and financers argue that their cost of funds does not have any correlation to Eibor now, and benchmarking their lending rates to Eibor is no longer viable.

There is also a large disconnect between Eibor - the rate at which a bank borrows from other banks - and the interest paid on deposits, which can be as high as seven per cent. Commercial Bank International (CBI)Commercial Bank International (CBI) has publicly invited deposits at rates as high as 6.25 per cent per annum.

While the three-month and six-month Eibor were at 4.362 per cent and 4.368 per cent respectively towards end-2008, they have fallen to 2.393 per cent and 2.702 per cent as of mid-August.

"Though the Eibor has fallen about two percentage points, our cost of funds has not come down by that extent. Moreover, long-term liability is drying up and has become a really precious thing," said a top executive at a Dubai-based bank.

Standard Chartered BankStandard Chartered Bank, for instance, which revises its loan rates every six months, informed their mortgage customers some time back that their loans will no longer be benchmarked to Eibor.

"Your current home loan has been booked on a six-month Emirates Inter Bank Offer Rate plus spread basis. Due to the volatility in markets, Eibor is no longer a true representation of the bank's cost of funds. Based on this, we have decided to replace Eibor with Standard Chartered Base Lending Rate, which will now represent the bank's cost of funds," the lender said in a letter to borrowers.

Most lenders base their interest rates either on Eibor or on their own so-called prime rate plus a margin that reflects the level of risk the bank believes is associated with a particular borrower. Earlier, even the prime rate used Eibor as a major reference point.

Chris Dommett, CEO of the UK-headquartered independent mortgage advisor John Charcol Middle East, told Emirates Business: "It could also be argued that as Eibor falls, lenders are looking to protect themselves against the increased risk of default, or protect their own profitability.

"Most banks will argue that the loan contract gives them the right to amend the terms and conditions at their discretion without reference to the borrower, but whether or not this fundamental change to the agreed contract would be supported in court has yet to be tested," said Dommett.

Prime rates are rarely transparent as the method of calculation is unclear, said one analyst. "It would normally be based on the bank's cost of funds plus a margin to reflect the risk associated with a borrower's profile. But we just don't know for sure," he said.

"This lack of transparency and the amendment of fundamental terms of a loan contract would not be allowed in more tightly regulated markets. Lenders defend the practice by saying that it is necessary to cover their increased real cost of funds and to insure against the higher risk of default in the current economic situation," he said.

By CL Jose

© Emirates Business 24/7 2009