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Fixed Rate Has Fallen To 1.25%, What About Floating?

In an earlier article, we presented a point-by-point fact check on the seven forecasts we have made over the past two years, which showed an accuracy of about 80% (5.5 times out of 7) in our predictions.  On the last forecast back in May, we made the call that we see fixed rates settling at an equilibrium level of between 1.25-1.35%.  We are happy to announce that indeed we now hit this point today!

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For loans above $1m, we’re now able to offer you 1.25% for a 2-year fixed or even a 3-year fixed rate mortgage.  And for most loans that’s above $500,000, you will be pleased to know that a 2-year fixed rate at 1.30% is very much attainable.

As what we put forth in this blog – this is the point when we become more neutral about recommending fixed rate home loan, at 1.25%.  As opposed to SIBOR floating rate home loans which we’ve been favouring since the start of 2019, and that remains pretty much the bias here from the MortgageWise team.  This position has been vindicated over and over again the latest being Fed’s announcement last month after its Jackson Hole retreat that it will now allow inflation to overshoot 2% which means – Fed will let interest rate remain low for a considerable long time.

Floating rate home loans on SIBOR (or for that matter the new 3-month compounded SORA) will still be the recommended mortgage option at MortgageWise.  However, we understand the perceived stability that comes with a fixed rate home loan with a fixed amount of monthly repayment to service.  That still seem to be the popular choice amongst homeowners in Singapore especially for the more risk-averse group or those with smaller outstanding home loans.  When fixed rates drop to levels in the 1.25-1.30% range, some homeowners wouldn’t mind paying a few percentage points higher in interest in exchange for that peace-of-mind knowing their mortgage costs won’t escalate even when the whole covid situation is over in 2021 (assuming).  That’s certainly a matter of personal choice more so than making the right choice when it comes to mortgage costs.  We respect that.

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The question to ask is how much does one “lose out” by opting for the higher fixed rate rate should interest rate continue to languish in the doldrums over the next few years which is our argument here.

This brings us to our 8th forecast – we predict that the equilibrium level for prevailing floating rates would eventually reach 1% (or slightly higher 1.00-1.20% for smaller loans).

We are not quite there yet but close, with a few banks currently offering spreads low enough for mortgages above $1m to start paying at 1.10%.  We hope we will get there eventually before the year is over (this could go into 2021 first half).  It will likely come about as buoyant purchase activities in the property market, due to a pent-up demand after phase 2 reopening in Singapore, grind to a halt.  Or as refinancing activities slow to a trickle.  Lenders who face pressure to acquire new customers will go on the offensive again by lowering spreads once more.  We just need one or two banks to get started.

Here, we also took a leaf from the last 2008 financial crisis.  For long periods between 2009 to 2014, the whole market was on floating rate. Nobody was interested in paying more on fixed rates, as far as we can remember.  Why would anyone want to pay higher rate if rates are going to remain more or less the same for the next few years?  Let’s look at the actual difference in savings using a typical private property outstanding loan of $700,000 at fixed rate of 1.3% vs a floating rate of 1.10%, over a 2-year lock-in period:

Loan Amount = $700,000
Tenure = 25 years
At interest rate of 1.30% (fixed), the monthly repayment works out to be $2,734
At interest rate of 1.10% (fixed), the monthly repayment works out to be $2,670

Most people will put the savings at $2,734 – $2,670 or $64 per month.  Not a lot.  If floating rate is unchanged at the end of two years, that would be a total of $1,536 in savings.

But that’s only on a monthly cash flow basis.  Remember with a lower rate, the interest component within the repayment each month goes down.  So, if you look at the actual interest paid over 24 months (see charts below, total interests over 2020-2021), that works out to be a difference of $17,604 – $14,882 or $2,722.  In other words, you are paying $113 less in interest every month.

$700,000 Over 25 Years At 1.30%
$700,000 Over 25 Years At 1.10%

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Not a lot of savings over two years? Perhaps for some.  Depends on your loan amount and factors like whether this is an own-stay or an investment property where you have rental income to defray holding costs.  Still, there’s a lot of things you can do with almost $3,000 saved over two years from bringing your family on a staycation or getting the new iphone 12 this Christmas!

Yes, I hear you.  How can we be so sure that interest rate will stay the same after two years?  This is a question we’ve answering over and over again.  And we’ve been vindicated on this more times than ever.  Of course, we cannot be 100% sure.  But one thing you can certain of – we have your back on this!  And you know what I’m going to say next – work with us long-term.  Our experience shows that 7 out of 10 times, clients who call us to do refinancing call us only when their lock-in is over.  They end up paying that few more months of higher interests unnecessarily.  When you work with a trusted broker, it’s not just those vouchers you receive as part of our rewards programme, it’s how much you save over time, or like 25 years!

Will we be spot on again for our 8th and likely final forecast?  To know the answer, stay tuned to this blog.  And why do I say it’s the final forecast?  Because once prevailing floating rates get to 1%, and Fed funds rate continue to stay near zero for the foreseeable future, there’ll be nothing else left to forecast, other than when would Fed starts hiking rates again and on a sustainable basis?  And how will you know when that happens?  Work with us.

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, buy your next Singapore condo or even review your commercial property loan, speak to our dedicated team of mortgage consultants here for the best Singapore home loan rates.

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