Rate Hike In 2015 Likely Earlier Now

We have started to sound our warning since last month rates might rise earlier than expected, though many think it is still a mixed bag of slowing growth in China and Japan going into mild recession, yet coinciding with news of sustained recovery in USA through 2014, Dow Jones to cross record 18,000 level soon, and oil prices plunging below USD70 per barrel and looking likely to stay down for 1^st half of 2015.

At MortgageWise we think the drop in gasoline prices is going to spur spending, plus the positive sentiments emanating from the year long recovery where we will finally see corporate profits translating to wage increases in 2015, something which the Fed has been waiting to see before they act.  The recovery in consumer confidence in US is going to be a big factor pulling Europe out of deflation as well as keeping China’s economic engine alive.  The positive spiral will be upwards.  The biggest risk to global recovery seems to be Euro woes which we will monitoring very closely from here.

If all the factors above are sustained and with winter arriving early this year leading to earlier recovery in both consumer as well as business spendings in 1^st half of 2015, we expect to see the first rise in the US Federal Funds rate sometime in Q2 of next year.  Most expect this to be middle or 2^nd half.

The good news is global growth will be accompanied by very slow rise in interest rates this time, thanks in a large part to the discovery of shale gas supply in US hence lowering energy prices as well as the shifting demographic profile of the humongous baby boomers generation all over the world.  Inflation will not rear its ugly head so quickly in this recovery as aging population will not spend as much as before.  Central banks will also not want to risk jeopardizing recovery after 5 years of pump-priming the economy.  So we expect rates to rise up mildly over the next 3 years.

What does this mean for investors here in Singapore where we are price-takers as far as interest rate trending is concerned.  Our interbank market follows after the US.

Two immediate implications come to mind :

• Take stock end of the year.  Do mortgage planning especially if you have two or more mortgages outstanding.  Remember the grace period given by MAS in Singapore for investors to be exempted from 60% TDSR requirement expires Jun 2017.  That is 2½ years away and if we were right in our forecast barring another Great Recession, prevailing rates will be moderately high by then.
• With impending rate hike it will be most appropriate to consider moving to fixed rate packages sometime towards end of 2015 just when rate are on its way up.  There may still be a small window for some to refinance 2 times to take advantage of the historical low rate now, if you act fast.

The 3-month Singapore Interbank Offer Rate (sibor) where most loans are pegged to has already moved up from 0.40% p.a. three months ago and now testing the 0.43% p.a. level.

We have also heard some local banks, wary of the likely rise in NPLs (non-performing loans) next year with continue decline in property prices, is going to increase their margins or spreads on loans.  Be forewarned here, all banks one by one is going to come out with new packages when we come back in Jan to start off the new financial year.

For those who still want to take advantage of the historical low rates and lock in say a fixed rate mortgage of 1.41% p.a. (this package expires on 15 Dec 2014) the time to act is now.

Look out for our next and last article for the year where we will be sharing specifically what to do and explain how to do an assessment of your current TDSR ratio.

Sign up to our newsletters to receive blurbs on interest rate movements and analysis for better mortgage planning. Speak to our experienced mortgage brokers today who can assist you with the right roadmap and decision for refinancing of your existing home loans amidst all the latest TDSR and LTV guidelines.