We are two years deep in a global pandemic, but that hasn’t stopped property buyers from snapping up homes in Singapore. Against all odds, the property market has remained resilient and property prices are surging.
Singapore’s mortgage interest rates tend to be closely linked to global interest rates. Many home loan interest rates are pegged to the Singapore Interbank Offered Rate (SIBOR) and, more recently, the Singapore Overnight Rate Average (SORA), which are linked to interbank exchange rates. When the pandemic began in March 2020, the US Federal Reserve slashed interest rates, which in turn lowered Singapore’s.
In short, the global recession brought on by COVID-19 has kept interest rates depressed over the past two years and made it easier for homebuyers to secure low-interest home loans.
All that said, if you’ve been monitoring the market, you might have already noticed that interest rates are climbing. Two months ago on 16 June 2022, the US Fed raised interest rates by 75 basis points which is the largest rate hike since 1994, and again in July 2022. Furthermore, more rate hikes are expected in the future.
Singapore homeowners are beginning to tighten their budgets because they will have to pay larger mortgages as a result of rising interest rates.
So, how will rising interest rates affect your property buying plans for next year?
COVID-19 and Global Interest Rates: Understanding Why Mortgage Rates Won’t Stay Low Forever
If the recent upward trend is any indication, the home buyers’ paradise of low-interest rates has ended. As we all know, the pandemic has been the cause of a global recession, leading central banks worldwide to cut interest rates.
This is common practice during a recession as lower interest can help boost economic growth. Lower interest rates make it easier to borrow money, which in turn encourages buying and keeps the GDP and economy chugging along. Conversely, if an economy is getting overheated, raising interest rates can cool markets.
Home loans in Singapore tend to be pegged to SIBOR and SORA, although there is a move towards SORA-based loans. SIBOR packages are currently being phased out before being discontinued on 31 December 2024.
SIBOR and SORA aren’t the same, but they do show similar general trajectories and both measure the interest rates on the interbank markets (i.e. the interest rates that banks in Singapore charge other banks when they lend money to them). SIBOR, in particular, is highly correlated to the US Federal Reserve’s benchmark federal funds rates.
In a low-interest rate environment, the interbank rate will naturally remain low, which pulls down mortgage interest rates.
It’s true COVID-19 battered markets and sent interest rates plunging. But we’ve already battled several variants of the virus and adjusted to the new normal. We’re also beginning to see global economies finally emerging from the recession.
In other words, it may still be some time before we can be rid of masks entirely, but economies are already starting to recover. The US’s pandemic stimulus programme is winding down, and interest rates are being hiked in response to higher inflation.
Singapore Interest Rates on the Rise: What We Can Expect in the Future
The fate of Singapore’s interest rates is closely intertwined with the US interest rates. So, it is important to know that the US Fed has plans to further increase the interest rates in the future, but at a slower pace. For those currently repaying floating home loans, you must have seen your interest rates increase.
Furthermore, analysts are predicting that the US Fed might cut interest rates in 2023. Currently, some banks in Singapore have raised their interest rates on their existing fixed rate packages. This is unsurprising, as most fixed rate packages will be valid for the next one to five years, the period during which the hike is expected.
|Types of home loan interest rates||What does it mean|
|Fixed rates||Fixed-rate packages give you a specific rate for an agreed lock-in period. Fixed rates are also more stable but you’ll only be guaranteed the same interest rate for a few years.|
|Floating rates||Floating rates are highly dependent on market conditions, as they fluctuate with the benchmark rate.|
Currently, DBS’s rate on all home loan packages is now 2.75% p.a., while UOB’s three-year fixed rate package is 3.08% p.a.. On 1 July 2022, OCBC too increased their fixed rate mortgages to 2.98% p.a.
Want to know how much banks are charging for their mortgages right now? Compare current home loan interest rates on PropertyGuru or check out our articles on home loan reviews for OCBC, DBS, and Citibank.
What Can Homeowners Do to Manage Their Home Loan Interest Rates?
It looks like homeowners will have to tighten their belts and prepare to pay even higher interest rates moving forward. Ensuring there is enough room in one’s budget for higher home loan repayments is going to be important in the coming years.
According to Paul Wee, Vice President, PropertyGuru Finance, PropertyGuru Group, homeowners should:
- Refinance to fixed-rate loan packages to mitigate the likelihood of higher SIBOR or SORA reference rates
- Consider making partial or full repayments if rates become too high via cash and/or CPF to manage cash flow demands
- Consider increasing the use of CPF for monthly loan servicing
- Split or refinance loans into separate fixed or variable loans to spread the risk between two portfolios
- If a homeowner is currently on a SIBOR-linked home loan package, he or she may consider moving to a SORA pegged one, as the latter is a backward-looking rate, and rate increases will lag the former. In addition, SIBOR will cease to be quoted from 2024. Banks may also possibly withdraw SIBOR packages earlier, compelling clients to move to other available packages and exacerbating the risk.
Besides these tips, here’s some extra guidance for homebuyers shopping around for loan packages and homeowners looking to refinance an existing mortgage.
1. Before Taking a Loan, Consider the Worst-Case Scenario
When taking out a home loan, it is best to always be cognizant of the worst-case scenario and ensure you’re still able to repay your loan should it come to pass. You might be comfortably able to make your home loan repayments in today’s low interest rate environment, but what would happen if interest rates rose or if you lose your job?
You want to ensure you have a buffer. When budgeting, assume a mortgage interest rate of 3.5% (banks already do this when assessing your debt servicing ratios). It’s the rate we set for our Mortgage Affordability Calculator too.
Estimate what you can comfortably spend on your new home
Another thing to note is that the home loan package with the lowest interest rate is not always the best choice. Sometimes, low promotional rates may seem very attractive, but it’s foolish to only calculate the costs in the first year. Do the math for the overall costs over the lifespan of the package. The rates may increase sharply after the promotional period, or there may be other fees or less attractive terms and conditions.
2. Go for Packages with Capped Maximum Interest Rates
Here’s a nifty strategy when shopping for a home loan or refinancing packages: instead of just looking at ‘pure’ loan packages with floating rates, you can focus on floating rate packages that cap the maximum interest rates chargeable during the lock-in period.
This way, you’ll be able to kill two birds with one stone by taking advantage of the current low interest rate environment while hedging against the risk of interest rates rising later on.
According to Paul, the typical cap for such packages currently ranges from 1.4% to 1.5%, which is very reasonable.
In this case, you should also consider the worst-case scenario and make sure you are not backing yourself into a corner with a restrictive contract. Make sure you read the fine print and understand how long the lock-in period is and whether there are any penalties for repaying the loan early, which is usually the case for cheaper fixed interest home loans.
In short, know exactly what you’re getting into so you can plan for the future.
Anticipating More Hike Rates in the Future
2020 and 2021 have been a roller coaster ride for all of us, but homebuyers came out on top thanks to low home loan interest rates.
However, in 2022, homebuyers may find borrowing money more expensive as things adjust back to normal.
If you’re thinking of buying a new home, refinancing your existing home loan or shaking up your investment portfolio with some new property picks, now is not the time to throw caution to the wind. Research your home loan options thoroughly and make an informed decision.
Remember, always look for loans with features that match your individual needs. As Paul puts it, “the ‘best’ home loan may not be the ‘best’ for you”!
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This article was written by Joanne Poh. A former real estate lawyer, she writes about property and personal finance and spends her free time compulsively learning languages and roller skating in carparks.