Ride Out The Next Interest Cycle On 4-Year Fixed

I have just covered this point in another article recently but as we approach US Fed’s next FOMC this month in March with pressure on interest rate once again I think it is important for me to re-iterate before fixed rates rise further. There remains a window of opportunity for homeowners to wise up to this simple but effective strategy to manage rising mortgage interests in the coming years.

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At MortgageWise we have been advocating 4 to 5 years fixed rate mortgage for sometime now, since early 2015 to be exact, when SIBOR continue its climb from historical lows. Back then you can still find 4-year fixed rate home loans at average of 2% p.a. and those clients who took our advice are already rejoicing now, especially if global economy continues to recover and interest cycles go back to historical patterns as seen in our chart below.

3M SIBOR trends history

If one ignores the abnormally-low rates after 2008 and look at SIBOR before the turn of the millennium, the average rate for SIBOR seem to hover in the 3% range throughout the 1990s (during US’s historical bull run of Bill Clinton’s office). This means that the market was paying close to 4% p.a. mortgage interest during those times.

What is most interesting to us in this chart is that in the last 3 major cycles of interest rate upswings in Singapore throught the last 30 years since 1987, it took roughly 3 years for the cycle to peak: 1988-1990, 1995-1997, 2004-2006. This time round we have good reason to believe it might take a while longer to reach the top and we put that at twice the amount of time needed or 5-6 years for the current cycle to peak.

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Noticed that after the Great Recession of 2008, SIBOR languish at sub-1% levels for 7 years from 2009 to 2014 which is the longer ever that has happened in Singapore beating that from 2001-2004. And because it is a Great Recession which took 3 rounds of pump-priming via Quatitative Easing (QE) for the American economy to finally recover from 2015, plus how global economy including Euro and China are still miring in slower growth, we believe that the pace of rates hikes will be gentle and forecast it will take 5 years this time for it to peak in this coming interest up cycle. To be precise we forecast SIBOR increase to be more gentle in next 3 years rising by 0.50% p.a. and that pace will accentuate in final 2 years after 2018 to the norm of 1% p.a.

This has big implication for mortgage strategy especially those with bigger outstanding loan sizes of above $1m and with no intention to sell the property. It means that by taking a 5-year fixed still available today at 2.55% p.a., not only can one lock down fixed rate at historical lows in the past 30 years, it also allows one to effectively ride out the entire interest rate upswing cycle. And if we are right in our forecast, by the time the 5-year fixed rate ends, the cycle would have peaked and start to reverse and that would be the time to switch back to SIBOR loans which will trend down much quicker.

We do understand, with the exception of a small group of far-sighted borrowers and those willing to “bite the bullet”, majority would still find 2.55% p.a. a tad on the high side after coming out from such a long period of sub-1% SIBOR rates, which is the reason why we propose going on a good compromise of 4 years fixed rate at 2.18, 2.18, 2.38, 2.38 or average 2.28% – acceptable by most. And to our clients we always like to add “you will be laughing all the way to the bank if by 2019 everyone is paying close to 4% on SIBOR and you are still at 2.38%!”

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with careers in banking & real estate before becoming an entrepreneur.
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