How do US Fed Interest Rates Impact Mortgage Rates in Singapore?

US Fed interest rates were cut for the first time since March 2020 in the latest September 2024 meeting. After many have wondered for months, "When will the Fed cut rates?" the benchmark interest rates were adjusted downwards by 0.5%; the current Fed interest rates now sit in the 4.75% to 5% range.

The bigger-than-expected cut comes after the US Fed interest rates were kept level since July 2023, following a series of aggressive hikes from a near-zero level in March 2022 following the COVID-19 pandemic.

So, what does this mean for Singaporean homeowners who have taken bank loans to finance their properties? In this article, we look at the current Fed interest rates and how the Fed cutting rates will affect mortgage rates and your monthly repayment amounts.

Unlike many other central banks, the Monetary Authority of Singapore (MAS) does not set interest rates directly but manages monetary policy through the exchange rate. Therefore, Singapore’s economy and financial markets are affected by changes in the global markets, including the US.

So, how exactly are the Fed interest rates and Singapore home loan interest rates related? How are current Fed interest rates and the policy decision of the Fed cutting rates relevant to homeowners? To understand this, we first need to learn about SORA, or the Singapore Overnight Rate Average.

Since 2022, SORA has been Singapore’s standard interest rate benchmark and is widely used to price home loans.

SORA, or the Singapore Overnight Rate Average, is the volume-weighted average rate of borrowing transactions in Singapore’s unsecured overnight interbank SGD cash market between 8 am and 6:15 pm. The SORA rate is published on the MAS website at 9 am the following day and serves as the basis of your bank loan’s interest rates.

Despite being determined by the domestic interbank market, the SORA is still influenced by the US Fed interest rates. This is because global borrowing costs impact how banks adjust their rates.

So, if you take on a floating-rate home loan that is pegged to SORA rates, you will find your mortgage interest rates tend to move with US Fed interest rates. The Fed cutting rates would mean you can expect your home loan repayments to drop, too.

While it is true that the SORA tends to move in tandem with the US interest rates, the change is not always immediate or proportionate, as seen in the graph above.

Let’s zoom in on the 3M Compounded SORA rate the day after the US Fed meetings concluded in 2023. While the US Fed interest rate hikes ceased from the May 2023 meeting onwards, the 3M compounded SORA rate only really flattened out in November.

That’s because the SORA is known to be less volatile as it is anchored to actual market transitions. Hence, it is unlikely that there will be dramatic and/or sudden dips.

If we see changes with the US Fed cutting rates, these adjustments will come gradually. Apple Tan, Team Lead – Mortgages, PropertyGuru Finance, explains, "The SORA could start to drop in days, or even weeks, with the Fed cutting rates. But the full effect may require several weeks to months to materialise, depending on liquidity conditions and market adjustments."

The US Fed interest rates are expected to fall even lower next year. Analysts predict the benchmark rate will hit 4.1% by the end of 2025, and mortgage interest rates in Singapore are projected to move downwards too.

A lower interest rate means lower monthly payments and potentially significant savings over time. How much does a 1% decrease in interest rates impact your monthly repayments? Ethan Ng, Team Lead – Mortgages, PropertyGuru Finance, breaks it down for us.

"Assuming you have a $1,500,000 home loan with a tenure of over 25 years and an interest rate of 3.85%, a 1% decrease observed in your mortgage interest rate would translate to an $800 drop in monthly repayments."

Lower rates could also increase your loan eligibility. Banks use a stress test rate to compute the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR). It’s a higher-than-market rate to test whether the borrower would be able to repay their loan in the event of rising interest rates.

While the Monetary Authority of Singapore (MAS) has set this rate as 4%, banks typically apply higher stress test rates to determine an applicant’s loan eligibility. As rates fall, banks will also lower the stress test rate (minimally at 4%), which means borrowers could qualify for a higher loan quantum.

To put this into numbers, let’s say the stress test rate is reduced from 4.85% to 4.70%. In this scenario, the loan amount for a resale private property that an individual earning $10,000 a month is eligible for increases from $1,042,000 to S$1,060,000.

The changes in monthly repayments and loan eligibility mainly impact new loan applicants and existing homeowners on a floating-rate package. However, even if you’re on a fixed-rate home loan, there is a way to take advantage of lower rates: refinancing.

If you’re a homeowner looking to save on your mortgage, you may wonder: Should I refinance now or hope mortgage rates drop even further in 2025? To that, Ethan advises, "Even though interest rates are projected to fall further, the costs of waiting may be more than you making the switch now."

Let’s consider an example: If the best available rate today is 2.40% and you have a $1.5 million loan with a 3.85% interest rate, refinancing now could save you 1.45%, amounting to $5,438 in savings by January 2025.

However, if you decide to wait until January 2025 to refinance, the interest rate would need to be below 2.31% to match the savings you could secure by refinancing now; otherwise, you’d miss out on those savings.

You can look up the latest mortgage packages on the market and compare them against your current home loan. You could also consider switching to a loan with a shorter lock-in period to take advantage of interest rate fluctuations and allow yourself more flexibility.

When choosing a home loan, Ben Goh, Team Lead – Mortgages, PropertyGuru Finance, advises that the lowest mortgage rates should not be the only thing you focus on.

"With the US Fed projected to have additional rate cuts by another 50 basis points before 2024 is up and the possibility of more cuts in 2025, it would be wise to consider the loan package that offers flexibility.

For instance, you may want to change the loan package during the lock-in period to take advantage of any future interest rate movements. Loan packages that offer free conversions are gaining traction in view of mortgage rates dipping in the near future.

With the US Fed cutting rates, existing homeowners who convert to a package with lower rates in the future may benefit from interest cost savings.

If you’re trying to secure a home loan or are considering refinancing your existing mortgage, speak to our friendly Mortgage Experts.

Not only can they guide you through the mortgage application process, but they also give you tailored home financing advice. Let us help you make your home loan journey a stress-free, smooth experience. Best of all? It’s free!