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UNITED Overseas Bank (UOB) is raising its mortgage rates by half a percentage point a year for certain existing customers, due to the rising cost of funds.

This is the second rate hike by the bank this year.

In its letter to affected customers, UOB attributed the need to raise rates to the 'rising cost of funds'' which are affected by the steady increase in interbank rates.

The three-month Singapore interbank offered rate (Sibor) rose to 3.554 per cent yesterday, having been as low as 2 per cent a year ago. This is the rate at which banks lend to each other and influences what consumers pay on their loans.

A more distant influence on local rates comes from the United States - where the Federal Reserve this week raised its benchmark rate by a quarter percentage point.

'We hope you will understand that loans that are below costs, including the current market cost of funds and operating cost, need to be adjusted,'' said UOB in its letter.

Assuming a home loan rate of 3.5 per cent a year after the hike, it translates to an increase of $127 for a housing loan of $500,000 with a 20-year loan tenure.

A check with rival banks such as DBS Bank, OCBC Bank, Citibank, Maybank and Standard Chartered Bank (Stanchart) showed that though they have no immediate plans to raise rates, they do not rule out the possibility of future rate hikes.

Said Citibank's business director of secured assets group, Mr Tan Chia Seng: 'Given that the three-month Sibor has risen sharply this year, it is a matter of time before this effect is translated into higher rates in the lending market in terms of rates.''

A Maybank spokesman said 'any increase will be measured and gradual''.

While DBS, Citibank and Stanchart have raised their rates once this year, Maybank has raised its rates twice.

Mr Tan added that the volatility in Singdollar/US dollar rate may fuel more increases in the three-month Sibor.

When contacted, Mr Kevin Lam, head of UOB's loans division, emphasised that 'not all home loan customers'' are affected by the rate increase.

'This adjustment in rates is to reflect rational pricing and commercial viability on an ongoing basis.''

He said the bank is 'still one of the most competitive'' - even after the rate hike. UOB's rate hike takes effect on July 28 for affected private housing loans and on Aug 3 for HDB home loans.

However, this spate of rate increases is not expected to continue indefinitely.

'The general view is that mortgages rates may rise further, before stabilising towards the end of the year,'' said Mr Tan.