The latest 26 July 2023 US Fed meeting concluded with interest rates rising to a benchmark of 5.25% to 5.5%.
How does this follow from previous US Fed interest rate movements? Since March 2022, when interest rates were near zero, we have seen US Fed interest rate hikes ten times. In tandem with US Fed interest rate hikes, reference rates like the Singapore Overnight Rate Average (SORA) have also trended upwards.
And while the previous 14 June 2023 US Fed decision to keep interest rates to a range of 5% to 5.25% suggested a shift in the narrative around interest rate movements, we didn’t rule out US Fed interest rate hikes across the rest of 2023.
Watch Singaporeans Respond to Interest Rate Hikes in 2023
How do rising interest rates affect homeowners? If you’re on a floating rate home loan, you’ve probably felt the pinch of your monthly mortgage repayments going up.
Is Now a Good Time to Refinance My Home Loan?
One way we like to find potential cost savings in our mortgage is through refinancing. Given the latest US Fed interest rate ‘pause’ and signs of interest rates moving ‘sideways’, is now a good time to refinance?
And if yes, should we refinance to a fixed or floating rate home loan?
Recently, one of our readers reached out to our PropertyGuru Finance Mortgage Experts on this exact dilemma. Read on to learn more about her predicament, and the advice three of our PropertyGuru Finance Mortgage Experts gave her.
Should I Refinance to a Fixed or Floating Rate Home Loan?
Dear PropertyGuru Finance Mortgage Experts,
I’m in my last year of a three-year fixed rate home loan, so I’m starting to shop around for a new home loan.
Considering the US Fed interest rate hikes across 2022 and so far in 2023, and mortgage interest rates movements, should I continue with a fixed rate home loan or move to a floating rate package?
And if I go for a floating rate home loan, which reference rate should I peg my home loan to? Thanks!
Advice from Our PropertyGuru Finance Mortgage Experts
Note: Our PropertyGuru Finance Mortgage Experts’ advice is accurate as of the time of writing (18 August 2023).
1. Consider the Benefits of Floating Rate Home Loans
By Paul Wee, Vice President – PropertyGuru Finance
Hi, thanks for your question!
While fixed rate home loans usually have higher interest rates than floating rate home loans – homeowners pay a premium for consistent monthly instalments – banks currently offer lower fixed rate packages than floating rate packages.
In view of SORA rates continuing upward and homeowners seeing their monthly instalments rising over the past year to date, fixed rate home loans have thus gained popularity in recent months.
Even in this high interest rate environment, however, there are still benefits of choosing a floating rate home loan, especially ones pegged to SORA. Here’s why I think if you decide to go for a floating rate home loan, you should pick one pegged to SORA.
SORA rates, the volume-weighted average rate of overnight SGD loan transactions by banks in Singapore, are updated every day on the Monetary Authority of Singapore (MAS) website. If your home loan is pegged to SORA rates, your interest rate will be exactly the updated rate on the first business day of every month.
Board rates, your other floating rate option, are determined by banks and based on their internal calculations and discretion. This means that there is less transparency when it comes to why you’re paying the interest rates you’re paying, and banks are able to adjust their interest rates ‘whenever’ they want – as long as they give their clients a 30-day notice period – regardless of market conditions.
SORA Tends To Move Up and Down Slower Than Forward-looking Benchmark Rates
SORA rates are formulated by actual transactions in the past 24 hours, while benchmark rates like the Singapore Interbank Offered Rate (SIBOR)* are based on projections of market interest rates. This means that while SORA rates have been increasing recently, SIBOR rates have overall been increasing faster.
*SIBOR will be replaced by SORA by the end of 2024.
Hope this helps!
2. Prioritise Flexibility Amid Uncertain Economic Conditions
By Ben Goh, Team Lead – Mortgages, PropertyGuru Finance
Hey there, great question!
In addition to Paul’s advice of choosing a floating rate home loan for rate transparency and potential savings, I would add that it’s good to choose a home loan that will allow you to make financial decisions in the near future if and when market conditions change.
If market interest rates continue to rise in the next year, you’ll likely have a different mindset when making big financial decisions like choosing your home loan.
Conversely, if market interest rates peak soon and dip in H2 2023 and across 2024, you won’t want to be locked into a three-year home loan with interest rates much higher than what other people are paying.
As a result, some banks have launched packages that assure clients flexibility in the near future:
- One-year fixed rate home loans with free conversions of rates after their lock-in periods expire
- Two-year fixed rate home loans with a one-time free rates conversion after one year
My advice is that if you’re worried about interest rates continuing to spike, you should consider using more of your CPF monies to pay off your home loan.
According to our home loan comparison tool, the most competitive mortgage package (in terms of the lowest interest rate offered in the first year) range from 3.43% to 4.70% (as of 18 August 2023), higher than the 2.5% interest earned in CPF Ordinary Account (OA).
This means that the money you’re ‘earning’ on your CPF interest rate will be less than the money you ‘lose’ if you prolong paying off your home loan.
In that vein, also consider doing a lump sum capital prepayment (i.e. pay off a portion of your mortgage upfront), so that the interest accrued on the remainder of your home loan over time will be smaller.
3. Assess Your Risk Appetite Before Deciding
By Apple Tan, Team Lead – Mortgages, PropertyGuru Finance
Ultimately, choosing a fixed or floating rate home loan is a personal decision. You have to take into account your current needs, risk tolerance levels, and long-term financial goals. But to help you along, here’s a quick summary comparing fixed vs floating rate home loans.
|Pros of fixed rate home loans||Pros of floating rate home loans|
|Fixed monthly instalments through the duration of the term||Typically lower initial interest rates compared to fixed rate home loans|
|Opportunity to budget and plan for the future due to fixed instalment||The flexibility of partial payment during the lock-in period, and switching to a fixed rate home loan afterwards|
|Protection against rising interest rates (if they continue to rise)||Savings during low-interest rate periods|
I agree with Paul and Ben that amid uncertain economic conditions, you should have an open mind about how things like market interest rates may shift in a short period. Because of that, you probably want to hedge bets within limits and opt for home loans that can allow you room to adapt freely when necessary.
One question I know many of us are wondering: Will interest rates continue to rise in 2023? In January 2023, our team predicted that SORA rates would reach 3.30% to 3.50% by the end of Q1 2023.
After the June 2023 Fed interest rate ‘pause’, we believe that Fed interest rates will likely ease off earlier into H2 2023. In tandem, we also expect SORA rates to increase at a slower rate than before, peak for a while, before decreasing towards the end of 2023. This downward trend of SORA rates is expected to continue across 2024.
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