how to choose fixed vs floating

Fixed Or Floating – 3 Trajectories

With interest rate seemingly at an inflection point, many are finding it hard to decide between fixed or floating rate home loan in Singapore.

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Most people still find the current fixed rate home loan at almost 2.40% (lowest 2-year fixed rate in the market now range from 2.34-2.38%) a tad too high for their liking, after being so used to sub-2% interest rate for the most part of the past decade.  On the other hand, if one does not lock in fixed rate, what’s worst than starting with floating rate at 2.13% (lowest floating rate on 1-month SIBOR) and seeing that rate go all the way to hit 3-4% in the next few years?

In fact, this is one of the most difficult times to make this call even for professional analysts and economists whose job are forecasting.  At MortgageWise we give our own forecast at the beginning of each year on where we see 1-month and 3-month SIBOR ending by the end of the year.  We will review this forecast every 6 months which means soon – after Fed’s FOMC next month.  So, watch this space.

The key driver for how interest rate in Singapore moves is still down to US Fed action.  To a lesser extent there are other factors too like the strength of the dollar (SIBOR has risen by 6 basis points in reent weeks as trade talks broke down between US and China), and the state of the local economy when banks become flushed with funds unable to lend out during economic slowdown (SIBOR actually tumbled in 2016 as a result of that even in absence of rate cuts from US Fed, see graph below).

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For this reason, we track the correlation between US fed funds rate and 3-month SIBOR (the benchmark interest in Singapore) very closely on our website:

us fed funds rate

It has taken US Fed a total of nine rate hikes over 3 long years since Dec 2015 to bring the fed funds rate from near 0% to 2.50% by Dec 2018, and 3-month SIBOR has responded in tandem rising from approximately 1% to 1.12% to 1.88% in the same period.  The correlation is strong between the two.

To help our clients, we further extrapolate the three most likely paths for US fed funds rate which will give us a fairly good idea of how SIBOR will move going forward.

Will US Fed continue to hike at the same pace – another 9 hikes over the next 3 years to bring the fed funds rate to 5% (Trajectory 1 in red)?   If that happens, surely SIBOR here in Singapore will follow in tandem and rise up to hit 3.50-4.00% which last happened in June 2006 when it peaked at 3.56%!  Add the spread and this means every one will be paying mortgage interest in the region of 4-5%!  More likely, the global stock market will crash so badly that it will force the Fed’s hand to cut rates long before that could happen.

Then there is trajectory 2 (in blue) which will be based on Fed’s current forecast of having either zero hike or perhaps one hike per year over the next 3 years – this trend assumes that trade war is eventually resolved and the global economy gets back on the growth path but the pace of rate hikes slows down dramatically – a much gentle slope of cimb compared to the preceding three years.

The final trajectory 3 (in green) is also a probable scenario where fed funds rate come tumbling down to revive an ailing economy that either gets overheated and crash, or a recession triggered by other factors like tariffs either on the demand side or supply side of things.  Certainly, judging by the pattern exhibited over the last 30 years, a dip does tend to follow after a brief period when Fed holds the rate steady which lends credence to the theory of a market crash typically a year after the yield curve inverts (the yield on 10-year Treasury note dipped below that of 3-month bills on 22 March 2019 for the first time since mid-2007, although it has recovered and go back and forth since).

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What is the conclusion?  There are two school of thoughts here – the general consensus is that the current interest rate cycle has either peaked or is somewhere near the peak as we are in a different world where inflation pressure is no longer like what it used to be with internet and global sourcing keeping prices in check.  There is a smaller group who believes the bull run still has legs and the uptrend will stay its course albeit at a much slower pace.  Don’t forget we also have to factor in macro events like how long it takes to resolve the current trade impasse, any potential Brexit fallout, US Presidential mid-terms next year, etc.

Speak to our team of professional mortgage consultants who can guide you through in this deliberation process.  Don’t forget besides deciding on general direction of interest rate movement, there are also other salient factors to consider when deciding between fixed or floating rate home loan, some which people overlooked:

  • Size of the outstanding loan
  • Owner-occupied home vs investment property?
  • Stability of one’s income
  • Ability to do partial prepayment
  • Any Intention to sell?

Besides getting our views, refinance through MortgageWise and you also receive $150 Refinancing Valuation Fee Offset from us, subject to min loan of $500,000.  Other terms and conditions apply. Speak to us today.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

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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.
View all posts by Darren Goh

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