We are about to wrap up 2022 with a final U.S. Fed FOMC meeting next month on 13-14 December which will likely see a smaller 0.50% rate hike. This makes for an incredible year of a total of 425 basis point (0r 4.25%) rate increase unleashed over a 9-month period since March 2022 – it’s the fastest monetary tightening cycle in history indeed!
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It has also been an interesting year too for us here at MortgageWise as we observe a year of contrasting human behaviour over two halves. Let me explan.
The First Half
The year started with us cajoling hard for clients to take heed and switch to fixed rate mortgages at 1.08% at the start of the year. Fixed rates stayed largely below 1.50% in the first 6 months even though we have picked up the signal that Jerome Powell has pivoted from his “transitory” (on inflation) stance ever since his re-appointment for a second term as Fed Chair since the end of November 2021.
It has proven to be an uphill task to convince people who were still enjoying relatively low floating rates pegged to SIBOR (paying in the range of 0.80-1.00%) to switch to fixed rates. It does not help that the new 3-month SORA mortgage peg has a 3-month lag which blindsided many into signing for floating rates in the first half of the year, unaware of how these rates will soon escalate beyond the initial headline-grabbing 1.00-1.20%. They ought to be opting for fixed rate mortgages which, at below 1.50% mostly, is a no-brainer recommendation from us.
Many also opted to do nothing and stayed on their existing floating rate mortgages pegged to SIBOR which were all hovering below fixed rates.
The Second Half
True to our warning, the climb in SORA starts to show up and became evident by Q3 especially after consecutive jumbo-sized rate hikes of 0.75% by the Fed in June & July. This was to be followed by two more 0.75% increase in September & November. By this time fixed rates have breached the most recent high of 2.58% last seen back in 2019. It continues to climb beyond what Singapore has seen in more than 15 years to hit 4.25-4.50% as of now.
As Fed’s tightening went even further than our initial forecast, 3-month compounded SORA has climbed to 2.90% (as of 30 Nov) and is now expected to end the year at over 3%. 3-month SIBOR went even higher and will likely close the year at 4.20-4.30%. This means homeowners on floating rates will see their mortgage interests reach 3.60-5.00% depending whether you are pegged to SORA or SIBOR.
What’s interesting human behaviour to us is – the reverse happens in the second half. We find ourselves having a hard time now dissuading people from over-committing on high fixed rates when it escalates beyond a certain point. Again, the reasoning is simple – if mortgage rates are all hovering above 4% on average whether you go for fixed or floating rates, why subject yourself to the risk of being stuck with a high fixed rate when we are near the end of the tightening cycle? Of course, no one can say for sure when the rise in rates will slow and eventually pause and go reverse (we do have a view on that, speak to us to find out more). Still it’s evident that we are nearer the peak of the cycle now then when Fed first started. There’re also more signs of inflation peaking soon which is assurance that we are not about to go back to the Great Inflation period in early 80s where Fed ratcheted interest up to 20% in order to rein in inflation running close to 15%!
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After being in the mortgage business for coming to a decade, our key message to the market as we are about to start a whole new challenging year in 2023 – being in a position where you are free to manoeuvre as we go into a year of inflection point in interest rates is a premium “worth paying for”.
Clients who work with us over the years continue to leverage on our experience and insights as we track the interest rate cycle closely. Knowing when to switch strategy, get out of compromised positions, be free to capitalise on “mortgage opportunities” as we near peaks & troughs in the cycle is the best value you could possibly derive from partnering with a mortgage professional. It saves you much more than comparing for any interest rate differentials between packages or free gifts/vouchers touted by banks & brokers. Just ask any of our numerous returning clients who have profited greatly during cycle-turning years in 2019/2020, and now also in 2022.
Stay tuned to this blog as 2023 will likely be another turning point in the cycle. Better yet, speak to us today and start a whole profitable working relationship with your most trusted mortgage advisor.
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