couple stressed by rising mortgage rates

Homeowners Caught Off Guard By Fast-Rising Mortgage Rates

Many may be dismal by rising fuel costs, food prices, property taxes, with the war in Ukraine set to make things worse.  While these increases will surely hit the pockets, its impact is a drop in the ocean when compared to the biggest inflation item – the “tsunami of rising interest rate” that’s about to hit our shores, fast.

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U.S. Fed Chair Jerome Powell has indicated in his latest congressional testimony last week that he’s in favour of a 0.25% rate hike this month.  Even before that happens (FOMC on 15-16 March), it looks like the market has priced in the increase with 3-month SIBOR, what most mortgages are currently pegged to, creeping up from 0.43% to reach 0.63% (as of 7 March).  1-month SIBOR has also risen from 0.30% to 0.43%.

Many homeowners have yet to fully grasp the extent and speed of how mortgage rates will soon escalate within a short span of time.  Just ponder this:  Today, if you act quickly, you can still sign onto a 2-year fixed rate mortgage at 1.35-1.50% (not many packages left); that same fixed rate was just 1.08% two months ago, and in a couple more months by end-June it could top 2% or even higher, should Fed execute a few consecutive hikes to fend off inflation.  The three local banks have already adjusted their 2-year fixed rate up to 1.65%.

Just how much of an increase would such a 60-basis point hike (1.40 to 2.00) translate to in absolute dollars?  Let’s do the math.  On a typical private property loan of $750,000 with 25 years tenure remaining, a move on mortgage rate from 1.40% to 2% would mean an increase in monthly repayment from $2,964 to $3,179, or $214.  That’s 7 per cent increase on a total cashflow basis.  If you consider how much more interests you are giving to the bank each month, you have to look at the interest-component which goes up with rising interest rate.  Looking at the first month instalment (where interest component is the highest), the interest proportion in the monthly mortgage has climbed from 30 per cent ($875 of $2,964) to 39 per cent ($1,250 of $3,179).  In absolute dollars, the real cost increment to you is $375 ($1,250 minus $875) per month, or 43 per cent!  Not 7 per cent.

homeowner shocked by how much mortgage interest he's paying

Many homeowners have yet to fully grasp the extent and speed of how mortgage rates will soon escalate within a short span of time.

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Globally, rates are rising as a result of central banks fighting to rein in red-hot inflation in 2022.  Inflation in U.S. reached a 40-year high of 7.50% in January, with core inflation (stripping out the volatile food & energy prices) also at a record high of 6%. Inflation reading for the month of February is set to be released this week on 10 March, before the FOMC meeting.  What’s more crucial is the next set of inflation readings in the U.S. for the month of March and April where we’ll see the biggest impact from rising oil & commodity prices due to the war.

In fact, it’s still not a foregone conclusion for a 50-basis point hike in March, should Fed see the need to pre-empt the impact from the war, rather than wait for the next meeting in May which is two months away (there is no FOMC scheduled for April).  Should Fed opt to “front-load” rate hikes with a half percentage point increase in one sitting, be it in this FOMC or the next, to bring fed funds to a range of 0.50-0.75% (now hovering around 0.10%), it will be the first time for the Fed to hike more than the usual 0.25% since before the 2008 great financial crisis.  And if Fed continues to hike in quick successive FOMC meetings until July, it will mark the quickest ascent in interest rates in over two decades.  Analysts from global banks like Goldman Sachs have forecasted five to seven hikes of 0.25% each in 2022 with fed funds rate ending the year at the 1.50-2.00% level.

We don’t think interest rate is necessarily going to shoot up in a linear fashion to hit 2%.  History has pointed to many twists and turns especially at the start of the tightening cycle when the Fed is still uncertain.  We’ve already seen how a geo-political tension can disrupt or potentially derail economic recovery from the pandemic in just matter of weeks.  It’s also extremely hard to forecast beyond six months in such unprecedented times, especially when you’re dealing with a public health crisis.  No one can say with 100% certainty that the world will not see another more virulent covid-19 virus variant in the 2nd half of the year, albeit all signs are pointing to some light at the end of the tunnel for this pandemic.

What we can say with certainty is this – interest rate is poised to escalate at the fastest pace in Singapore in the second quarter of 2022.  Many homeowners, accustomed to paying very low floating rate SIBOR home loans at 0.50-0.80% in the last few years, will suddenly find themselves paying mortgage rates close to 1.40% by July.  Many will be caught off guard.  That small window to act – to lock down fixed rates below 1.50% today, is fast closing.

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