In the last blog post, we talked about how when it comes to fixed rate home loan, you have more assurance that the rate would really stay fixed no matter what – banks are unlikely to change the rate unilaterally unlike floating rate housing loans where spreads can be changed.

However with the recent run-ups in interbank rates since late 2014, fixed rate loans in Singapore are closing in on 2% p.a.  Our predictions over at this blog (on 7 March) that there is only a small window of between 1-3 months to secure fixed rates below the psychological 2% is bearing out.  Stanchart has announced they will increase their 2-year fixed rate from 1.88% p.a. to 1.98% p.a. (no difference from 2%) from 11 May next week.  With that, Maybank would remain the only bank left with average2-year fixed rate of 1.88% p.a. (Year 1 – 1.78, Year 2 – 1.98), but not for very long too we think.

Unlike very matured mortgage markets like USA where banks could offer 15-year fixed rate mortgages (currently just a tad above 3% p.a.), CIMB remains the only bank in Singapore that offers the longest fixed rate period of up to 5 years for private properties and HDB at 2.48% p.a. and 2.55% p.a. respectively.  You think that is high?  Just look at the historical trending analysis of sibor over the last 26 years in one of our earlier write-up.

This week let’s take a look at what are some of the scenarios or criterias for entering into fixed rate home loans.  There are four we could think of.

1. You are quite sure of sibor hitting at least 1.5% p.a. sometime in 2016

Looking at the roller-coaster predictions of professional analysts over time, it will be hard for anyone to stare into the crystal ball and purport to know exactly how high interest will go up to and by when.  Will sibor hit the all-time high of 8% p.a. at some point?  No one knows.

However it will be reasonable to expect it to hit 1.5% p.a. within the next 6-12 month – a 35% jump from the current levels especially once interest lift off in the US which is a consensus.  Coming from such a low base, it will not be inconceivable too for a 50% hike to 2% p.a. at some point (probably 2 years in my view) if you ask me.

If you agree with me on sibor hitting 1.5% within a year, prevailing floating rates by then will reach 2.4-2.5% p.a. and fixed rates will go to 2.6-2.8% p.a.

Hence it would still make a lot of sense to lock in CIMB’s 4-year fixed rate at 2.18, 2.28, 2.38, 2.38 (average 2.31% p.a.).

2. You do not see any issue refinancing the loan when the fixed period ends

Some of us may have income that is cyclical in nature and some businessmen may decide to pay themselves lower salary but higher dividends in a particular year for tax planning reasons.

You need to make sure once you go on a fixed rate strategy, you are able to refinance the loan with relative ease the moment the fixed rate period ends and often the interest rate then reverts to a much higher floating rate.  You should also meet the 60% TDSR (Total Debt Servicing Ratio) requirements.

3. You do not foresee yourself selling the property soon

The tradeoff with fixed rate home loan is that in return for the peace of mind that comes from knowing your monthly repayment is fixed for the next few years, you lose the flexibility of paying down your loan in full or in parts.  There is always a prepayment penalty during the lock-in period of the loan typically 1.5% on the amount redeemed.

Partial repayment is usually not a problem as you can easily put any excess funds you obtain into almost risk-free instruments like sing dollar fixed deposits which probably pays you rising deposit interest rate matching that of your mortgage fixed rate soon.  However selling of your property is something else.  You will be slapped with the prepayment penalty on the full outstanding loan.

4. If you have more than 1 mortgage and this property is for owner-occupation

Some people may not be aware, MAS has given exemption on TDSR for good for owner-occupied property since 10 Feb 2014.   However for investment properties the exemption will expire on 30 Jun 2017 or in 2 years’ time (currently those who do not meet TDSR can still refinance by paying down usually 3% of the loan outstanding provided the property was purchased before Jun 2013).

It follows then that for owner-occupied homes, where the exemption is given for good without an expiry date, borrowers could opt for fixed rate mortgage to reap maximum savings in an environment of rising interest rates as they could more easily refinance later on without TDSR restrictions.  The same cannot be said of investment properties and borrowers might want to go for a mortgage loan with a more stable peg or with the lowest spread thereafter so that they do not have to worry about refinancing home loan every few years.  We will cover more on this important point in subsequent posts.

At MortgageWise.sg, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner when you buy condo Singapore. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.