Homeowners Beware – Don’t Get Stuck!

Recession, economic slowdown, war, energy crisis in Europe pulling down the rest of the world, geo-political tensions in Taiwan straits, cryptocurrency crash, slowdown and property contagion risks in China, monkeypox… And don’t forget there’s till the risk of another new covid-19 variant?

Bottomline – don’t be too sure yet.  If anything, learn from history.

In recent weeks, some brokers and bankers were peddling fixed rate home loans frantically trying to “scare” homeowners to sign on fixed rates in excess of 2.50% for the next two years.  Within the span of a week after the latest FOMC meeting, the narrative has turned 180 degree.  Suddenly, Fed seems more dovish and the market is now pricing in expectations of recession and that Fed will begin to slow its hike and even cut rates by 2023!

Meanwhile the bond market has carried this to the extreme with 10-year treasury yields crashing from a high of 3.50% in the middle of June all the way down to 2.50%.  That could have eased some cost pressure for lenders.  Already one bank has started to offer again 1-year fixed rate mortgage at a lower rate of 2.50%.  Though we don’t expect fixed rates to drop back much as floating rate on SORA home loans is still trending up.

What does that all mean?  Those yet to sign on the dotted line for a home loan package with a two-year lock-in period had better think twice.  History might be about to repeat itself.  Back in early 2019, repricing banks and some brokers were touting fixed rates at 2.48-2.58% and those who overcommitted live to regret for the next two years as interest rates peaked shortly after that.  Fed started to cut rates three times before 2019 was even over.

This time around, however, interest rate is certain to go higher as fed funds rate had already match up with its most recent peak at 2.50%.  Yet U.S. Fed is not quite done yet with tightening as inflation hit 40-year high in the U.S.  So, how high can it get to?  That’s the million-dollar question.

With a more contrarian view in this blog, we think the question to ask if not so much how high can interest rate get to, but how long it takes to peak?  And because this is the fastest tightening cycle by Fed in history, we have no doubt this time round it will peak sooner than not, before the mid of 2023. And no prize for guessing what happens when the rate peaks.

Back in early 2019, repricing banks and some brokers were touting fixed rates at 2.48-2.58% and those who overcommitted live to regret for the next two years as interest rates peaked shortly after that.  Fed started to cut rates three times before 2019 was even over.

So, whether you are going for fixed or floating rate home loans, our key message now – don’t overcommit yourself.  Don’t get stuck with a long lock-in period.  Two years is a fairly long time (think how long Covid has been) which you are obligated to pay that agreed mortgage rate all the way until end of 2024! And you could get stuck in both directions: Sign on a high fixed rate and begrudgingly service a mortgage rate of almost 3% (for some) for at least 18 more months if U.S. inflation and interest rates roll over by H1 2023 due to a recession; Conversely, commit to a long floating rate contract and become a sitting duck if rates climb unabated with banks jacking up your mortgage repayment every other month.  You have no other options except to pay up.

Lastly, don’t get the wrong ideas.  First, we believe 3-month SORA will continue on a slow and steady climb, but not before a surge in Q3 this quarter (3-month SORA at 1.2830 as of 2 Aug). It will only stop rising when Fed pauses which in turn depends on inflation in U.S. peaking and going below a certain acceptable level. We need a few more months of data to confirm that. Next, know that we have nothing against fixed rates!  Being in the mortgage business since 2014, we’ve seen just too many homeowners end up overcommitting on fixed rates in a generally deflationary environment ever since the QE era started (quantitative easing, a.k.a. Fed printing money).  What’s different this time is inflation is indeed at 40-year high in U.S. both a result of supply constraints and contentious fiscal stimulus expanding M2 money supply, further exacerbated by Ukraine war.

However, supply constraints will ease over time and monetary tightening will curb spending eventually.  Otherwise, don’t doubt the Fed’s resolve to keep pushing rates higher until a point where it crashes the economy.  So either way soft or hard landing, inflation would have to come down. And things might come to a boil quickly by mid of 2023.  Stay nimble.

For those who are still unsure how to choose, take a look at the interest rate cycle and speak to our experienced team of consultants here at MortgageWise.sg

So, whether you are going for fixed or floating rate home loans, our key message now – don’t overcommit yourself.  Don’t get stuck with a long lock-in period. Two years is a fairly long time (think how long Covid has been) which you are obligated to pay that agreed mortgage rate all the way until end of 2024!

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