Fasten Your Seat Belt For Over 3% Mortgage Interest!

So far this year what we have forecasted had come true.  We said in March that interest will escalate and urge many homeowners still on SIBOR home loans then to switch to 2-year fixed rates at below 1.50%.  We warned again in May that floating SORA packages seemingly low then at 1% headline rate will ultimately rise up to 2% by the time the new loan starts in July/August.  Today 3-month compounded SORA has hit 1.60% as of 1 Sep 2022, which means most will be paying interest at 2.40%!

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Where Do We Go From Here (On Interest Rate)?

3-month SIBOR has stabilized at 2.50% in the past month as there’s a two-month break for U.S. Federal Reserve rate-setting committee (last FOMC meeting on 26-27 July and the next one on 20-21 Sep).  Meanwhile, 3-month SORA has been playing catchup as it compound-averages the rising daily SORA spot rates over the past 90 days which encapsulated the 200 basis point hikes (2%) by the Fed from May to July.  We have warned earlier regarding this laggard effect and how you will see SORA suddenly surge in Q3 which is happening now.  It has risen from a low of 0.77% at start of July to 1.60% within two months and it’s not quite done yet.  

We expect SORA to stabilize at 1.80% which closes the gap with SIBOR to within 0.70% if Fed stops hiking rates now.  But that’s not going to happen.  After a hawkish Fed talk in last month’s Jackson Hole symposium, the market is now pricing in at least another 0.50% rate hike, maybe 0.75%, in September FOMC.  This will likely be followed by smaller hikes in Nov and Dec to bring fed funds rate close to 3.50% range by end of the year, a level that the Fed will want to see gets done.

What this means for interest rate in Singapore is that both SIBOR and SORA will continue its climb in Q4 and with the gap between the two opening up once again as SIBOR prices forward on rate expectation and go decisively above 3%.  SORA will continue to play catchup in Q4 until it closes the gap with SIBOR once more and end the year in the 2.50% range.

If all these sounds complicated, just know this – as early as next month in October, those still on SIBOR home loans who have yet to refinance will be paying mortgage rates close to 3.50%, the rate actually used for TDSR (total debt servicing ratio) computation.  There’s a possibility MAS might review and revise the TDSR rate up to 4.00-4.50% which will mean lesser loan for those yet to purchase a property.  And by the start of 2023, with the exception of those on fixed rates, almost everyone will be paying mortgage rates in excess of 3%! Fixed rate home loans will be priced even higher at 3.50%. The Singapore market has never seen mortgage rates at such levels for over a decade.

You may wonder what about those with mortgage rates pegged to FHR or board rates?  There’s no prize for guessing when that will happen.  For every month’s delay in raising rates, you can expect a bigger increase to come all-at-once when the bank sends a one month notice to you.  Already, you have read how banks have recently adjusted their deposit rates up aggressively from fixed deposits to high-yielding savings accounts like DBS Multiplier, OCBC 360 account, etc.  Revision to lending rates will surely follow next, and likely more than once.  In the last tightening cycle in 2018, banks in Singapore raise lending board rates two to three times within the span of 12 months.

SORA will continue to play catchup in Q4 until it closes the gap with SIBOR once more and end the year in the 2.50% range.

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What’s The Implication For Over 3% Mortgage Interest?

We still see many mortgage broker sites comparing interest costs merely by the difference in monthly mortgage repayments.  That’s only half the story.

In a nutshell.  When interest rate is at 1.50%, about 70% of what you pay every month goes to reduce your loan balance and 30% to interest.  When interest rises to 2.50%, this split is about 50:50.  But when interest gets to 3.50% the opposite happens: About 60% of your monthly repayment goes to the bank’s coffers as interest revenue, only 40% will go to reduce your outstanding loan.

What this means is that when interest rises over 3%, you’ll find that your loan gets repaid much slower even though you are paying more every month.  For a typical $750,000 private property loan over 25-year tenure, over a two-year perod, your outstanding loan gets reduced by $50,000 with interest at 1.50% versus $38,000 with interest at 3.50%.

One Last Chance To Lock Down Fixed Rate At 2.50%

The next FOMC meeting is scheduled on 20-21 Sep.  For those with lock-in expiry within 6 months and who don’t like to take bets on floating rate, there’s still one final chance now for you to lock down a fixed rate at 2.50%!  It might end quickly within the next one to two weeks so we urge you to take fast action.  That’s a full 1% savings for almost the entire 2023 if prevailing rate stays up close to 3.50% (or even higher) which works out to be $7,500 saved for a $750,000 home loan.

Before you start thinking we are promoting fixed rates, speak to our experienced team of consultants here at MortgageWise and hear our forecast and unique mortgage strategy that’s based on the interest rate cycle.  Don’t fall prey to herd instinct out there.  Many brokers, we heard, had been touting floating rates when they were still low at below 2%, and now that rates have surged to 3% the same brokers are now selling high fixed rates as panic sets in.  Whatever sells may not always be the right choice.

And by the start of 2023, with the exception of those on fixed rates, almost everyone will be paying mortgage rates in excess of 3%! Fixed rate home loans will be priced even higher at 3.50%. The Singapore market has never seen mortgage rates at such levels for over a decade.

Compare Singapore home loan rates quick and fuss-free at MortgageWise.sg.  Work with the team who can bring value to you at all five levels including our expert viewpoints & forecasts which helps you to navigate interest rate cycle astutely be it for residential or commercial property loan. Work with us today and help support our social cause too!