HSBC has recently launched a home loan package that is linked to an equity index, the Morgan Stanley Capital International Singapore Free Index. The Singapore Free Index tracks 27 heavy weight stocks in Singapore.
Under this new package, customers are charged an interest rate of SIBOR + 1.1% throughout the loan tenure.
With the special equity-linked feature, the customer will get a cash rebate of 0.25% (of the current loan outstanding amount) if the Singapore Free Index manages to appreciate 30% from its original price (known as barrier level). This 30% appreciation check is done once every quarter over a period of two years.
Thus, it is possible for a customer to get a maximum rebate of slightly less than 2% of the original loan amount. Practically, the amount of rebate will not hit the maximum possible as there is no guarantee the Singapore stock market can rally 30% from current levels in the near future.
A minimum loan size of $200,000 is required and the package is currently only available to new and existing HSBC Premier customers.
HSBC’s new home loan offer is available until Nov 30. To qualify for HSBC Premier, customers must maintain a total relationship balance of at least $200,000 with the bank.
While this is indeed an innovative idea by HSBC, I am not so sure whether consumers in Singapore are ready for it at this present moment, especially when people are been hurt in the past year by so many structured products that have gone wrong. I am not so sure whether there is a prospectus for this, but I don’t think anyone is about to start reading through a 100-page prospectus for taking up a home loan?
this structure can be decomposed into:
1. plain vanilla housing loan
2. deep out of the money call option on MSCI Free Index.
i note that the interest rate of SIBOR + 1.1% is slightly higher than what other banks offer (i have seen some SIBOR + 1% packages). Thus, HSBC could be using the extra 0.1% markup to purchase the deep out of the money call option (more likely, they are using 0.05% markup to purchase and pocketing the other 0.05% as profit).
nobody will structure something without profiting from it. remember this. no free lunch.Reply