lock in fixed rate mortgage before interest rate hike

A Temporary Reprieve?

3M SIBOR has retreated in recent weeks to 1.06 (as at 6 Apr) from its recent high of 1.25. This came after dovish comments from Fed’s FOMC meeting last month and expectations of rate hikes being pared down from the initial four to perhaps just one or two rounds this year. Subsequently the USD weakened quite significantly leading to the downtrend on interbank rates.

Will this situation last or is it just another temporary reprieve before SIBOR resumes its climb?

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More than a few banks quickly lower down their rates especially on 2-year fixed rate packages in a bid to win back some market share. A quick survey shows that around 5-6 banks are now dangling 2-year fixed rate in the range of 1.90 to 1.99%. Some have also lowered the spreads on their SIBOR floating packages.

As history always repeats itself, we observed that once again homeowners’ interest start to mount on SIBOR packages which start to look attractive at 1.60% versus those of fixed rate and even when compared to those of DMR (Deposit Mortgage Rate) packages at 1.80%. And there will always be that group of unsuspecting homeowners being drawn to super-low headline Board rates especially in the first year at 1.48%.

Just last week, we have discussed at length why we are never for Board-based packages in an environment when rates are expected to trend up, regardless of how low is the rate dangled in the first year, and such packages always come with a lock-in. Still we are amazed by how easily people fall for such low rates without thinking through why banks are willing to drop their rates below market in the first place.

Of course if we turn out to be wrong in our assessment and rates stay low at this current level for the next 2-3 years or go even further south with another global financial crisis in 2nd half of 2016, we would have given the wrong advice to clients and they would be better off on SIBOR packages.

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However all the signs are there that we are hitting bottom of cycle and there is only one way to go – Up:

  • Oil price has not recovered convincingly yet, but it will (politically-motivated). We are expecting this to take place earliest towards end of the year or middle of next year as there are reports now of more US shale oil producers folding up More than 50 oil & gas producers has gone under since early 2015 according to a Reuters review. More are expected to face troubles if prices do not recover above USD40 per barrel by next year. Already banks that lend to the shale oil industry had cut their credit lines by one-fifth in the latest round of semi-annual review. More cut will be expected. This is exactly what OPEC has been waiting for but there is still some more damage to be done for consolidation to run its full course. We give it another year.
  • Eventually when oil supply is cut, especially if that coincides with mild recovery of the Chinese economy next year, oil price will recover to USD60 level which will slowly cause inflation to rise in US just as what Yellen & company has expected (in her latest interview of Fed Chiefs).
  • US economic data will continue to improve through the 2nd half of 2016 as the warmer summer months return, barring any shocks from a US Presidential race.
  • Sustained US economic recovery and the slow rise of inflation will force the hand of US Fed maybe as early as June this year to the surpise of many analysts.

Understand that above are our views and, unlike most other mortgage brokers or consultancy firms who choose to “go with the flow” depending on what their clients ask for, we do stick our neck out and dispense our recommendation based on this house view. No doubt there is some risks that we could get it wrong, but we think it is a calculated risk. So far we have been proven largely right in the past year I am glad to report. And let me re-iterate this, it only takes one or two rounds of rate adjustments from the banks (after each US Fed rate increase) for SIBOR or even DMR interest rate to level up with current 4-year fixed rates, all within the next 12 months.

So in summary we do believe what we are witnessing now is nothing more than a temporary reprieve on interest rate hikes and homeowners will be well heed to make use of current window to refinance quickly.

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Just as a disclaimer, our views here apply strictly to how we see recovery in US economy, and not so much in the Singapore context, which we think is facing strong economic headwinds even if the US recovers over the next few years. We are going through structural changes with rising business costs, increased competition from the region and North Asia, undiversified economy with a generally-weak SME sector, aging work force, etc. We also cannot foretell movements in the stock market which might go south as interest rises. We think there will be some effects of deleveraging and unwinding of “asset bubbles” in Asian economies in the next few years, brought about by the 3 rounds of QE, as hot money continue to flow back to the west.

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements.  Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
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