At MortgageWise we have been advocating going long on fixed rate mortgage for up to 4 or even 5 years for almost the entire of 2015. We have good reason to say that. Looking at the historial trending of 3-month SIBOR, the benchmark for mortgages in Singapore, over the last 30 years since 1987 (see below) one will agree that even at 2.55% (for private properties) for 5-year, that would be locking down fixed rate at levels near historical lows.
Maybe a 4-year fixed rate might be more palatable (CIMB offers a 4-year fixed at 2.18, 2.18, 2.38, 2.38 for private properties). However most we speak to earlier still balk at the idea of paying a slightly higher premium of about 0.30% between 4-year fixed rate average of 2.28% and the lowest 2-year fixed today at 1.99% (Citibank’s 1.88% aside which is only for big loans above $1.5m). However a small group that went with our recommendations may yet have the last laugh when interest uptrend continues. In fact some are already thanking us when they locked down 4-year fixed rates at average 2% p.a. a year back when 2-year fixed rates were lowest then at 1.38%. If you look closely again at the chart above, it took roughly about 3 years for each of the 3 interest upswing cycle to play out in full before it peaks which means – taking a 4-year fixed rate will likely allow you to ride out this immiment cycle ahead of us from 2016 to 2020! Note however we do think because it is a Great Recession in 2008, this time round the pace of rate hikes will be slower in the initial 3 years so it might take slightly longer like 5-6 years for the cycle to peak.
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To see how much one will save based on our assumptions on the pace of rate hikes, take a look at the graph below where we compare between someone taking a DMR (Deposit Mortgage Rate) home loan (we use OCBC’s 36FDMR in this example) versus that of CIMB’s 4-year fixed at 2.18, 2.18, 2.38, 2.38. Without going into amortisations or calculating monthly repayments, visually one can see that the potential savings on fixed rate over the next 4 years can be as much as 5 times that of going on a floating rate home loan. Do not get us wrong. There are still good reasons to go for DMR loan, especially for smaller loan sizes. Speak to our consultants to understand which is a better option based on your mortgage situation today and your objective. As we have covered this earlier in another article, there are at least 6 factors to consider before deciding on fixed versus floating.
Lastly CIMB just made some changes to their rates to their 3-year and 5-year fixed rate home loan, but leaving their 4-year fixed rate unchanged. We see this as an opportune time to lock down 4-year fixed rate quickly before it ends the promotion once the quota is met. And we do not know at which point will the bank pull the plug on 4 and 5-year fixed rate as the local banks do not seem keen to want to offer fixed rates beyond 3 years, in fact usually 2 years most of the time.
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements. We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal. We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.
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