With Bank Of China finally moving up its fixed rate packages as of today, the gap between the lowest FDR floating rate (1.60%) for private properties and the lowest fixed rate (1.75% average over two-year fixed term) has now widened to 0.15 or 15 basis points. And if you look at lowest 3-year fixed rate average (1.82%) instead that gap would widen further to 22 basis points.
As a rule of thumb we have always advised that, in a hawkish interest rate environment, any gap of less than 50 basis points generally justifies the decision to lock down on a higher fixed rate. The rationale is that in such an environment when US Fed is expected to hike an average 3-4 times a year, it would take less than a year for interest rate to jump more than 50 basis points. But is it all that simple?
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We also remember what happened two years ago at the start of 2016 when SIBOR (3-month) appear to climb vehemently to a high of 1.25% before a collapse all the way back to 0.87%. Will a similar situation arise in 2018 when SIBOR started the year at 1.50%, then dropped back to 1.12% by end of January, now back up to 1.37% but drop off again in 2ndhalf of the year?
Indeed, this roller coaster ride of SIBOR has made the job of interest rate forecasts a daunting task. Which is why at MortgageWise we do this forecast only twice a year – once at the beginning of the year and a revision (if any) in the middle of the year after Fed June FOMC. For now we are still maintaining our forecast that SIBOR (3-month) will hit 2% by end of 2018.
Back to the question of how one should decide between fixed and floating rate. We have been advocating fixed rate for a while now since end of 2017 squarely on the fact that this gap between fixed and floating is almost non-existent. Now that prevailing fixed rates have slowly inched up above floating by a gap of 15-20 basis points, there may be a few other considerations albeit we still tend to lean towards fixed with such a small gap.
There are 6 factors to consider when choosing between fixed and floating:
1. Gap Between Fixed And Floating
We have already discussed this at length. At this point in time, the small gap and the hawkish rate environment favour fixed rates and I would add that the longer 3-year would be preferred.
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2. Investment Vs Owner-Occupied Property
Why would that have a bearing on decision to go fixed or floating? Well again as a general guide, when rates are trending up, it is better to lock down fixed rates on an own-stay property where one is servicing the loan via one’s hard-earned income. On the contrary, investors may be more open to a “fluctuating” rate based on money market rate movements which reflect borrowing costs of the day. In terms of cashflow management, a rising interest rate usually means a buoyant economy and hence ability to fetch higher rents (not always true). Investors feel “less pain” with a floating rate as the mortgage repayments is serviced through passive rental income rather than active work income.
3. Intention To Sell
This is related to the preceding point on investment vs own-stay property. For the former, investors would usually like to retain the flexibility to sell the property for highest returns without incurring unnecessary costs like a lock-in penalty (one never knows when an offer might become too good to refuse be it from enbloc or private treaty). A floating rate package with no lock or minimal lock-in period would cater to this need. Whereas in the case of own-stay property, homeowners would have no qualms about lock-in period as there is no desire to sell and unroot oneself.
4. Size Of Outstanding Loan
This can be the single most important point of consideration after looking at the gap between fixed and floating. Very often, homeowners do not realize that there is a minimum loan size for refinancing to make sense. We got this point covered in a case study which you could read here.
The dilemma faced by homeowners of bigger loans (>$1m) is related to the last point on one’s interest rate outlook. The question for this group of clients is – should one refinance to lower floating rate or lower 2-year fixed rate to reap immediate savings as the amount involved is substantial? Or should one bite the bullet and pay higher premium for say a 3-year fixed rate with the view to save even more in the coming years?
There is no easy answer and perhaps the best way is to speak to our consultants who will customize a Mortgage Framework which includes an interest rate simulation to show you close to actual savings beween the various packages.
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5. Stability Of Income
This can be an important factor as we move deeper into a digital economy over the next 10 years, with many industries facing headwinds due to technological disruptions. Remember, one needs to pass the 60% TDSR (Total Debt Servicing Ratio) each time one remortgages, be it a re-financing or a re-pricing exercise. Even though there can be exemptions by MAS for own-stay properties, many lenders still put in place their own internal credit policy on allowing up to a certain level of TDSR (usually 80%) before they will take in the loan.
6. Interest Rate Outlook (Price To Pay For Peace-Of-Mind)
No one has a crystal ball. But still one can make certain calculated assessment based on broad market macro developments. Though every one might hold a different view, one thing we can all agree on is that it is important to constantly re-assess the environment and adjust this view as time passes. This is when it makes perfect sense to work with a professional mortgage consultant who tracks news on interest rate regularly. Start a working relationship with your personal mortgage broker today.
Yet there may be those who would rather pay a little extra premium in exchange for that “peace-of-mind” from knowing that come what may, his monthly home loan repayments would remain constant for the next three years.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.