There is noticeable change in sentiments after the Brexit vote as more uncertainties loom for global financial markets. There is a wide spectrum of views & predictions from analysts suggesting anything from a rate hike in September, or earliest in December, to even rate cuts instead of hikes for 2016. In fact with 10-year US treasury bond yields down some 20% to 1.40, deriatives and futures market even point to a rate hike only possible in 2018 at the earliest.
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Where do we go from here in terms of mortgage planning? At MortgageWise, even as we try to make sense of the unexpected turn of events of the past weeks (no one saw Brexit coming), two things have become quite clear to us.
1. No One Can Forecast On SIBOR Movement In Next 6 Months
Let’s be honest whatever views you hear now on the timing of rate hike (or cut) we say you probably need to just discount them and wait. No one can predict what is going to happen. It is too early to assess the full impact of the Leave vote as events unfold over the next 6 months ending with a US Presidential election in November. Will Euro crisis of 2014 return with a vengeance? Scotland looks likely to breakaway from what will then be a dis-United Kingdom and what next for the UK and European economy? What will be the impact on trade and will financial markets turmoil, if that happen, stall US economic recovery? What will then be US Fed’s most likely response come its next few FOMC meetings starting from this month July. Most have now priced out any rate hikes this year with the earliest likely to occur in December 2016’s FOMC.
Before Brexit, we have actually pared down our forecast to just 1 round of rate hike earliest in September and possibly maximum 2 rounds for 2016. We recognize Brexit has major implications for financial markets in the world and could bring about recession in UK with negative spillover effects to Euro and then to the rest of the world as global financial markets are intricately linked. After Brexit, like I said it will be futile and meaningless to give any take on timing of rate hike. Hence we will suspend our forecast on rates for the next 6 months as doing that is like playing roulette.
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2. In Uncertain Times, Conventional Wisdom Is To Stay Nimble
So how should homeowners then go about planning for their mortgages be it taking up a new purchase loan or refinancing an existing one that has just ended its lock-in. Is it better to go with fixed rate or floating rate now?
We think the best move now might be to stay flexible and remain totally nimble – try not to enter into any mortgage contract that comes with a lock-in or with the shortest lock-in possible like not more than 1 year. Unless of course one decides to go for a 2-year fixed rate that comes with a 2-year lock-in, which we may still recommend depending on factors like loan size, own-use versus investment property, or some other salient factors of consideration. Speak to our consultants who can help you in this process.
Some in the industry expects rates to trend down from here and that banks will fall over themselves in the next few months to come out with lower fixed and floating rate spreads. That is hard to put a finger on. And since it takes at least 3 months before one starts to enjoy the lower rates on a refinanced home loan to the new bank, it is better to take action now as we have now witnessed some of the lowest spreads on SIBOR loan in the market. We are of the view that SIBOR spreads cannot go much. The only caveat for refinancing to SIBOR home loans is that should interest start to rise again early next year, there might be additional transactions costs to switch to a fixed rate home loan after just a few short months of moving the mortgage. For this reason, floating rate strategy might make more sense for those with bigger outstanding loans.
For those with smaller loans or who prefer to have peace of mind of not worrying about rate movements and just service a fixed monthly repayment, we think going on a shorter 2-year fixed rate with the lowest interest starting from 1.65% might make a good choice. Doing so one also hopes to catch the point when interest is finally and firmly on its way up to then lock in fixed rate for a longer period.
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What a difference two weeks has made in terms of sentiments. Even the US Fed has its fair share of twists and turns in its policy position in the past 12 months. Rates might still trend up towards end of the year especially if US Fed decides to go ahead with a 2ndrate hike in December. No one can tell for sure. Staying nimble and ready to switch between fixed and floating strategy requires sound judgement and a close monitoring of the fast-changing global environment. This is where working with a trusted mortgage consultant delivers the most value. And before one makes any move, know all his or her options. A mortgage consultant can also give you an overview on all packages in the market and not just those from one single lender.
Do speak to our experienced consultants who can also calculate and show you the savings and costs involved before you decide to switch banks, as clawback of legal fees subsidy might just wipe out all potential benefits. For this reason it might still make sense to go on 3-year fixed rate for some, we need to run the numbers for you first.
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements. Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders in Singapore.