(F) man deciding on home loan packages

Fixed Or Floating Rate Home Loan In 2020?

We still get quite a number of clients coming to us with that question.  Even though the benchmark interest rate 3-month SIBOR has crashed quite significantly from 1.77% at the start of the year to 0.99% (as at 8-Apr).

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The best analogy I could give is this: When driving up a slope, you would need to shift to a low gear for more power to make the climb. But once you hit the peak and start to make a descent you have to change gear – you cannot carry on with the same low gear!

It’s the same when it comes to mortgage loans.  Over a 25 or 30-year loan tenure, there will be many ups and downs in interest rate cycles.  You’ll need to “change gear” from fixed rate to floating rate or vice versa when the cycle turns.  If you try to stay on the same gear throughout, you will end up paying more interests either way.  When interest rate is going up and you stay on floating, you’ll pay more interest.  That’s obvious.  But when interest rate is going down and you stay on fixed, you’ll still be paying more interest too!

Back in 2016 when US Fed made that first historical rate hike in a decade, we wrote about interest rate peaking by 2020 as this cycle may take longer than the usual three years (last seen from 2003 to 2006, see graph below).  It took about 3½ years in the end as US Fed started to cut rates by July 2019!  In fact, we started advocating shifting of gear to floating rate strategy since the start of 2019.  Clients who took our advice then are now enjoying the ride as they see their interest rate pegged to SIBOR plummets all the way from 2% to 1.25% just twelve months into their new loan.

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We understand how many are still fearful of runaway interest rates after what they’ve just experienced in the past few years.  They wanted to go on fixed rate for that peace-of-mind, never to go through that unpleasant experience ever again.  But they’ve forgotten it’s exactly because they fail to change course and switch to the right gear that got them ‘burned” in the first place. We’ve got clients who hedged on 3-year fixed rates at 1.58%-1.99% in 2016/2017, which expires nicely in 2019/2020 and are now doing the right thing by switching gear again to floating SIBOR home loans.  And they continue to enjoy the ride as interest slides.

As professional mortgage consultants who know the trends and strategy – the last thing we want to see is for the same group of people who got “burned” by rising interest rates on floating, to now switch to fixed “at the wrong time” and end up paying higher interests than they should for the next few years, once more.

I would much rather they stay on course or on the same gear, be it fixed or floating, for the entire loan tenure.  That way, at least they only miss out on getting the mortgage strategy right for only half the cycle.  For example, if they stay on floating all the way and refinances now to floating SIBOR home loans, they start saving on interest costs (at potentially 1.20-1.40%) over the next few years which will compensate the higher interests (2.30-2.70%) paid before 2020.

Still not convinced that it’s time to switch to floating rate?  We always go back to the interest rate charts for “hard data” that do not lie.

3-month SIBOR vs fed funds rate

As Singapore uses exchange rate in its monetary policy to manage the economy, the benchmark interest rate 3M SIBOR is allowed to fluctuate according to market conditions which largely correlates with the US Fed funds rate.  The latter is now near zero like 0.05%.  Which means there’s more room for SIBOR to fall at current levels.

Most interestingly, look at how long it took for interest rate policy in US to reverse and “recover” from each dip in the recent past – 3 years from 2001-2004 after the dotcom bubble burst/911/SARS, and 7 years from 2008 to 2014 after the last financial crisis.  Does anyone think that, after the current crisis is over, the blue line (fed funds rate) will suddenly snap back into a V-shaped so quickly in 1-2 years?  Unlikely.

Until US Fed starts to hike again and quite possibly only after a series of hikes that prove to be sustainable without derailing economic growth, you will not hear us recommending fixed rate home loan.  And if it takes another 7 years to recover from the trough this time round, let’s just say that you will be on a 1% to 1.20% home loan for quite some time!  If you can act fast, that is.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, or to buy your next Singapore property, speak to our dedicated team of mortgage consultants here for the best home loan rates.

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