It's a nightmare scenario for homeowners who take out mortgage loans: Being told by the bank that your mortgage interest rate has been increased by three times during an economic downturn.

In fact, over 100 individuals who took out mortgage loans from CIMB found themselves caught in this situation.

Incensed, these folks — including a business owner who has paid off almost all of his S$300,000 loan and a doctor who had just secured a S$750,000 loan for his executive condominium — banded together to voice their grievances on HonestMortgages.sg

So what happened exactly?

In April 2020, CIMB Singapore informed its customers that it would be raising the floor rate of certain mortgages nine times from 0.1 per cent to 0.9 per cent effective May 18, 2020.

This was later pushed back to Jan. 1, 2021 because of the backlash from CIMB's affected customers.

Wait up, what's a floor rate?

When you take out a home loan from a bank, you need to pay interest on the amount that you borrow.

This takes the form of a fixed interest rate (e.g. you pay 2 per cent for three years) or a floating interest rate which varies but is pegged to a benchmark (like the Singapore interbank offered rate, SIBOR or Swap offer rate).

A floating interest rate also comes with a floor rate, a mechanism that protects the lender in case interest rates become negative (in which case, the lenders have to pay customers when the latter borrow money).

CIMB Singapore originally set their floor rate at 0.1 per cent.

So for instance, if the SIBOR or Swap offer rate drops below 0.1 per cent, mortgage customers will still have to pay an interest rate of 0.1 per cent plus an accompanying spread.

If the SIBOR is above 0.1 per cent, the interest rate is whatever the SIBOR (or Swap offer rate) is plus the spread.

Increased floor rate to 0.9 per cent

Still with us? Great.

In April, CIMB decided to increase the floor rate to 0.9 per cent, which effectively increased the interest rate for many disgruntled customers.

As of June 1, the one-month SIBOR rate was at 0.248 per cent, which was much lower than CIMB's new 0.9 per cent floor rate.

The group of affected CIMB customers said:

"Because of this, the interest on our mortgages became effectively 3x of what we would have paid under the proper arrangements. If interest rates continue to fall, that number could be higher."

One told The Straits Times (ST) that he would have to pay S$6,400 more every year which amounted to about 2.8 times more interest.

Another self-employed customer told ST that she would have to pay S$8,000 more each year in interest.

Why was CIMB able to do this?

Contractually, CIMB had this clause in its terms and conditions, which was included in a document separate from the Letter of Offer.

"The Bank shall be entitled at its absolute discretion at any time and from time to time to vary or change the interest rate of the Facility."

"Digging deeper, we found out that in fact many banks have similar clauses. Most consumers who noticed this would have hoped that banks would behave reasonably, presumably out of fear of their reputation," said the affected customers.

"Turns out, that was not the case for CIMB. In fact, we believe that no other bank has had the audacity to raise interest rates in this manner during a period of falling rates."

It was jarring for mortgage customers because just recently, Education Minister and MAS board member Ong Ye Kung told Parliament that MAS expects housing loan interest rates "to be revised downwards in a fair manner where this is consistent with sustained trends in banks' cost of funding for such loans".

Meanwhile no other banks, as far as we know, tried to pull off the same stunt, especially during this economic downturn.

United Overseas Bank, DBS and Standard Chartered Bank Singapore told Today that they do not intend to raise their mortgage floor rates.

CIMB makes U-turn

After the ensuing backlash by CIMB's customers, the bank decided to scrape the floor rate increase altogether, announcing that it will reduce its deposit rates and cost of deposits to maintain its floor rate at 0.1 per cent.

It also apologised for the "inconvenience caused".

CIMB announced on June 3 that it would be maintaining its 0.1 per cent floor rate for certain mortgages.

The bank also offered its mortgage customer a two-year fixed rate of 0.9 per cent or a three-year fixed rate of 1.10 per cent.

What's stopping banks from raising floor rates unilaterally in the future?

This is not the end though.

A spokesperson for HonestMortgages.sg told Mothership that the incident raised several questions that are still unanswered, one of which being whether it was illegal for CIMB to unilaterally increase the floor rate at its absolute discretion.

Granted, the clause was written into CIMB's mortgage contracts, but a literal reading would mean that it's appropriate for the bank to conjure any arbitrary number like 10,000 per cent and customers will still have to pay up.

This "makes no sense", according to the affected customers.

The fact that this clause is still included in CIMB's mortgage contract brings up the issue of unfair contracts and the protection afforded to consumers, particularly those not well-versed in finance issues, said the spokesperson.

The group also pointed out that there is nothing to stop CIMB — or any other bank, for that matter — from raising floor mortgages at its discretion in the future.

While most of the affected customers are satisfied that CIMB has backtracked on its decision to increase the floor rate now, the spokesperson said that this group might channel its resources into tackling these issues, perhaps as a non-profit.

If these are matters which interest you as well, you can write in to [email protected].

Top image via vymaps.com and honestmortgages.sg

Editor's note: The article was updated with CIMB's apology and announcement that it will reduce its deposit rates and cost of deposits to maintain its floor rate at 0.1 per cent.