homeowner distressed by rising mortgage rates

Homeowners Stuck Between A Rock And A Hard Place

Back in February, we blogged about March being the most crucial month for refinancing in 2022.  True enough, two months later mortgage rates has escalated at such a pace that even some mortgage brokers are caught by surprise – 2-year fixed rate had risen from 1.25% in February to 1.95% now in April.  And all that after just one small 0.25% rate hike in March by U.S. Fed, which has just gotten the tightening cycle underway with six more hikes projected for the year.

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Here at MortgageWise.sg, we tried our best to issue repeated calls and warnings since the end of last year where we detected a reversal in Fed Chair Powell’s stance since November 2021 when he was re-appointed for a second term.  Inflation is no longer transitory and Fed has to act.

The value of working with a trusted mortgage broker is most pronounced in such cycle-turning times.  Had you work with us, you might be one of the many clients whom we had alerted with lock-ins expiring in the second half of 2022, and whom we helped secure 2-year fixed rates from 1.08-1.35% as early as seven months before the expiry.  These lucky clients would be having the last laugh as they were also the same group of clients whom we prompted to go floating on SIBOR home loans with ultra-thin spreads back in 2019/2020.  They had been paying mortgage rates in the range of 0.50-0.60% in the last few years!

At the same time we must also applaud the faith and decisiveness of these clients who took our advice.  Why faith?  Because it’s never easy to give up something good on hand in exchange for fixed rates at double (1.08-1.35%) of what they were still paying then (0.50-0.60% floating rate).  You need to exercise some faith in trusting our advice, if you have not been monitoring and tracking the Fed as closely as us.  That’s the best value we can bring to clients over time as your mortgage partner, more than any vouchers, free gifts or even direct-to-bank rates.

2022 is certainly a cycle-turning year (refer to our interest rate cycle).  And this is the fastest Fed tightening cycle on record if it plays out according to script.  Various Fed officials have spoken in recent days alluding to a 0.50% hike on the cards in next month’s FOMC.  The latest remark from Fed Chair Powell almost sealed that as a done deal. The market has in fact priced in two 0.50% hikes in May and June, followed by another standard 0.25% hike in July (there’s now talk of maybe three 0.50% hikes in a row).  If Fed indeed front-loads these hikes in the next three FOMC before a pause in August, it would have added a full 125 basis points increase in fed funds rate to bring it back to the exact same level before the pandemic struck in March of 2020 – 1.75%!  (U.S. Fed cuts by 0.50% to 1.25% on a Sunday night before eventually slashing it all the way down to zero two weeks later)

How would that impact interest rates here in Singapore?

middle-aged homeowner thinking about gear up term loan

Referencing our interest rate cycle, it’s reasonable to expect the 3-month SIBOR to ascend from the current 1.05% (as of 21 Apr) to reach 1.70% by July.  That would mean those on 3-month SIBOR floating rate home loans will be paying mortgage rates in the range of 2.10-2.40% by mid-year!  And the worst part is – that might not be the end point yet.  Fed could continue to hike after August until it gets to neutral at some point.  Doing nothing does not seem like an option.

Fixed rates now at 1.95% (2-year) will continue to ratchet up as banks also front-load these increases.  Another 0.50% increase is easily within sight to hit 2.50% range-bound.  The problem with contracting fixed rate mortgages at over 2% is that one might get stuck with a high rate if there’s a sudden downturn in the economy and Fed reverses its policy and starts slashing rates!  Indeed, the memory of that still haunt those who signed down and repriced fixed rates at 2.38-2.58% in early 2019.  After nine rate hikes over the course of three years from 2016-2018, many feared that mortgage rates would run amok and scrambled for the safety of fixed but high rates, only to find the Fed reversing to do three “insurance rate cuts” by second half of 2019.  To make matters worse, the pandemic struck the following year and rates plummeted all the way to zero with most stuck with at least another year of high fixed rate to service.

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If Fed indeed front-loads these hikes in the next three FOMC before a pause in August, it would have added a full 125 basis points increase in fed funds rate to bring it back to the exact same level before the pandemic struck in March of 2020 – 1.75%! 

Is history about to repeat itself again in 2022?  That’s the biggest risk factor if you continue to chase after fixed rates above 2%.  Or is it a whole different story this time with inflation at 40-year highs of 8.5% in the U.S. which will take a long time to tame by having interest rates staying elevated above 3% for a sustained period?  In which case, locking down fixed rates even at 2.50% seems like a smart choice today.  At the most extreme, will we go back to the Great Inflation of 1965 to 1982 where inflation reached almost 15% in the U.S. alongside high unemployment – stagflation. Eventually it was put out by the Paul Volcker Fed with a combination of high interest rates (peaking at 20%) and slow reserve growth, but not before tipping the economy into a severe and protracted recession which lasted almost two years in 1981-1982.

When fixed rate rises above 2%, homeowners will be stuck between a rock and a hard place.  This is what we want clients to avoid when we made repeated calls over the last few months for them to switch tact from floating to fixed rate, before that happens.  It’s much easier to make that decision with fixed rates at 1.08% to 1.65%.  Faith is all that’s needed.

Mortgage planning in the next few months is set to become trickier.  Banks would love homeowners to ditch fixed rates for floating, for obvious reasons.  But is that the right strategy going forward?  What about the war in Ukraine which has thrown a spanner in the works?  In fact, the war has become a smoke-screen which has distracted many and delayed their decision to go fixed earlier.  What about the other key themes for 2022 we have highlighted at the start of the year?  Some are slowing playing out – China’s lock down and supply chain issues, covid-19 variants, etc.

All eyes will now be on the series of Fed decisions coming up over the next few months.  Sit tight.

The value of working with a trusted mortgage broker is most pronounced in such cycle-turning times.

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