When domestic interest rates are largely influenced by global market trends, especially by U.S. interest rates, they can be expected to rise.
As interest rates rebound from historic lows, mortgage brokers are advising future homeowners and those seeking refinancing to lock in fixed rates before the gap between fixed and floating rates widens and while they remain in a relatively low range.
The U.S. Federal Reserve (FED) stated on December 15 that in its fight against inflation, it will double the pace of its bond-buying taper, with most members forecasting three rate hikes by the end of next year.
For an open economy like Singapore, domestic interest rates are largely influenced by global market movements, particularly those of the United States. Therefore, we can expect interest rates to rise.
Anjia SG‘s founder, Guo Yaoyang (Leo Kwek), said that banks here have already priced in these expectations. In recent weeks, fixed rates may have already risen by about 30 basis points.
Guo added that for a S$1 million mortgage, for example, it was possible to get a home loan with a fixed rate of 1.10% in November, but that is no longer possible now, as fixed rates have risen to around 1.50% to 1.60%.
Floating rate packages pegged to the Singapore Overnight Rate Average (SORA) are still relatively subdued, as they tend to be more correlated with short-term interest rates, which have not changed significantly recently.
Guo added: We expect a more pronounced upward trend in interest rates when the rate hikes, possibly in the second half of 2022, actually materialize.
Types of Mortgage Rates
In Singapore, the Housing & Development Board (HDB) provides loans for those purchasing public housing. The annual interest rate for an HDB loan is 2.6%, which is 0.1% higher than the current rate offered by the Central Provident Fund (CPF) Ordinary Account.
Those buying private residential properties will have to take a bank loan, which is also an option for HDB flat buyers. When taking a bank loan, borrowers must choose between fixed-rate and floating-rate packages.
For fixed-rate packages, borrowers can enjoy the same interest rate throughout the “lock-in period,” which can span from 1 to 5 years. After the lock-in period ends, the interest rate will be pegged to a reference rate. This reference rate could be the bank’s fixed deposit rate or the Singapore Interbank Offered Rate (SIBOR), depending on the loan package chosen by the homebuyer.
Fixed rates are often slightly higher than floating rates, but by choosing them, borrowers are essentially “buying” peace of mind, as their mortgages are less affected by rising interest rates compared to floating-rate loan packages.
The interest rates for floating-rate loan packages can be adjusted periodically based on changes in SIBOR or the fixed deposit rate. These loan packages often charge lower interest initially, but borrowers must be able to withstand a significant risk of rate hikes. Some floating-rate loan packages do not have a “lock-in period,” giving borrowers the flexibility to refinance with other banks without incurring any penalties.
Locking in a Fixed Rate
Even when the U.S. Federal Reserve’s rate hikes take effect, it will take some time for their full impact to be felt in Singapore. Therefore, now is still a “fairly safe” time to lock in a fixed rate at around the historically low baseline.
“At such a low interest rate baseline, especially in the current, more hawkish environment, you can’t go wrong with your choice,” Guo said.
Wayne Quek, a senior mortgage consultant at Home Loan Whiz, advises homebuyers with low to medium risk appetites to stick with shorter-term fixed-rate packages and review their plans after two years.
Clive Chng, associate director at RedBrick Mortgage Advisory, also believes that existing homeowners looking to refinance their mortgages should opt for fixed rates. However, he also pointed out some exceptions.
A floating-rate loan package would be suitable in the following situations.
When interest rates are set to fall, floating rates are typically affected accordingly. However, even in a rising rate environment, they can still make sense for certain groups of people.
For those taking out a new loan and hoping to sell their Singapore property within 1 to 2 years, they might consider a floating-rate loan package. This choice offers certain benefits, including waiving penalties incurred from the sale, a feature not typically available with fixed-rate packages. Therefore, floating-rate loan packages are generally more suitable for real estate investors who value flexibility and wish to sell their properties whenever a high offer comes along.
Those who want the flexibility to make prepayments should also opt for a floating-rate loan package. Rising interest rates may prompt borrowers to pay off their mortgages faster to avoid paying higher interest in the future. For instance, those who expect to have extra liquidity in the coming years through good bonus payouts or other means could also consider a floating-rate package.
Interest Offset Mortgage Accounts
However, Clive Chng of RedBrick Mortgage Advisory suggests using an interest offset mortgage account as an alternative to paying off the mortgage before the end of the loan tenure, as deposits in such accounts can earn high interest that matches the home loan rate.
The interest earned in such an account is first used to offset the interest payable on the home loan, while the balance is used to pay down the principal portion of the loan. In the long run, this can help pay off the home loan within a shorter repayment period.
“One of the advantages of such an account is that the deposits can be used as cash, whereas if you use a portion of your funds to prepay the home loan, the remaining amount becomes a fixed asset,” said Clive Chng.
The catch is that with different banks, the deposits in an interest offset mortgage account can only be used to offset a small portion of the home loan.
Currently, only three banks—Standard Chartered Bank, Citibank, and HSBC—offer interest offset mortgage account services.
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