This is a sequel or follow-up piece to the one we published in May when we first warned about how some homeowners were spoofed by low headline interest rate of 1.00-1.20% on 3M SORA floating home loan packages. We said then that most who signed on such packages will be surprised to start their new loan two months later in August at 2% or higher.
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Fast forward today, the latest reading on 3M SORA as of 22 Jul is 1.12310%. Our prediction has come true. We are not yet in August but SORA is merely 0.08% away from reaching 1.20%, the point where most new loans will be start off or “rate reset” at 2% as the average spreads on SORA home loan packages back in May was 0.80. In fact, the spreads had since compressed to 0.65-0.75% which is typically what happens when interest rate rises and competition amongst banks intensify.
In the first half of the year, we see absolutely no need to bet on floating rate when you could still sign and lock down fixed rates at below 2% for either 2-year or at least 1-year fixed term. That’s the main recommendation to all our clients as the imperative then was to “hold down” with a low fixed rate for at least the next 12 months when Fed will be front-loading most of the rate increases.
Now that fixed rates have escalated beyond 2.75%, we started to tweak and adjust our strategy and recommendation for 2023/24. However, we felt compelled to write this sequel article as there continues to be some “misguided” advice in the marketplace based on what we read and heard.
First, you still have some brokers saying how SORA will rise up slowly. That’s only half-right! Since we last wrote about this in May, U.S. Fed has gone big on rates hikes to 0.75% increase in June. And another 0.75% hike is almost a done deal by next week. Understand this: Fed has unleashed a total of 200 basis point hike (0.50%+0.75%+0.75%), what which will normally take them two years to do, in barely 3 months from May to July. And the full effects of unprecedented rise in rates have yet to fully show up in our 3M SORA here. Compounded SORA is backward-looking in nature as it averages the daily SORA values over the last 90 days (read our article on how SORA works). Hence, expect 3M SORA to surge fast in Q3 reaching most likely 1.50-1.80% level by end September, before the pace of increases will taper off. This means most homeowners on SORA floating rate home loans will see their mortgage rates rise to 2.20-2.50%.
Does that mean fixed rate at 2.75% today is the best choice? At the same time, you have another group of analysts and brokers touting that in a rising rate environment, the right thing to do is always to go fixed with no regard to the interest rate cycle. That argument seems to ignore the rising risk or likelihood of one getting stuck with a high fixed rate when the cycle reverses at the peak and rates come crashing down (it always come down). Obviously, it’s one thing to lock down fixed rate at 1.50% right at the start of the tightening cycle; it’s another consideration when you lock down fixed rate at 2.50% mid-point in the ascent if you like; or even 3.50% if you don’t believe that’s tail-end of the ascent. To know what to do, you’ll first need to consider how high can fed funds rate get to in this upswing cycle?
In the first half of the year, we see absolutely no need to bet on floating rate when you could still sign and lock down fixed rates at below 2% for either 2-year or at least 1-year fixed term.
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It’s not an easy decision no doubt, as no one can foretell 100% what’s going to happen next. We live in uncertain times where black swan events (totally unpredictable) seem to become more common place. At the same time, inaction or doing nothing is not an option given how most homeowners are still on SIBOR floating rate home loans. SIBOR, being forward-looking, is escalating at an even faster pace than SORA. The gap between 3M SIBOR and 3M SORA has opened up wide (more than 1%) over the past months but is now looking to narrow as SORA starts to play catch-up with a surge in Q3 as we’ve explained.
After taking a short hiatus in June, MortgageWise is now back and ready to give our insights on how we see rates play out from here. We do need a few more months of U.S. inflation data to confirm the trend but I think we can give you fairly reasonable forecast and what’s the best mortgage strategy going forward in 2023/24. However, our recommendations are now reserved exclusively for clients who wish to work with a trusted broker long term – you’ll have to need to speak to our consultants first.
Since our inception in 2014, we’ve helped thousands of clients planned forward to save big on mortgage interests. We did that in 2019/20 when interest cycle turns down, switching clients to super-thin spreads throughout (until the last year of the loan tenure) of 0.25-0.40% on SIBOR home loans. Again, when the cycle swings up by end 2021, we helped to alert and provided first-mover advantage to those with lock-in expiring in 2022 to take action and lock down fixed rates below 2%.
We’ll continue to help clients “stay ahead of the curve” and 2023/24 is no different. But there will be many twists and bumps along the way and we’ll have to adjust forecast and tweak our recommendations accordingly. That’s why it’s important you work with us long-term and look past immediate short-term gain or inconveniences of refinancing. Over the long term we save you more than any gift vouchers, cash back or even direct rates from banks.
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Expect 3M SORA to surge fast in Q3 reaching most likely 1.50-1.80% level by end September, before the pace of increases will taper off. This means most homeowners on SORA floating rate home loans will see their mortgage rates rise to 2.20-2.50%.