We often hear some commentators lamenting online about how it’s wishful thinking that interest rate will come down soon, and how it has stayed high for more than two years by now.  In other words, that long wait for it to roll over has proven elusive.  They say stop waiting. 

“Higher for Longer”, Really? 

Indeed, we know high interest rate has crushed REITs and some other interest rate sensitive sectors like real estate, but is that necessarily true on mortgage rates?

One cannot see this from the interest rate cycle, but the anomaly has played out for more than a year now due to the inverted yield curve – fixed mortgage rates trending lower and lower than floating rates with each passing month since March of 2023.  It’s about to crash below 2.80 per cent in our opinion, and this is before U.S. Fed is now set to cut rates widely believed by September.

What’s happening?  Mortgage rates were indeed on the rise by leaps and bounds in 2022 to over 4 per cent by start of 2023, with 2-year fixed rates peaking near 4.25 per cent.  However, it didn’t stay high for two years like what some have suggested, in fact not even a year.  Instead, fixed rates went on a protracted downfall since, with more than 150 basis points drop all the way to the current 2.88 per cent for average-sized loans of above S$500,000.  This could even go to 2.80 per cent for much bigger loans.  What stayed stubbornly high were floating rate home loans packages pegged to SORA.

Put all that in perspective – we had interest rates languishing in the 1 to 1.50 percent range for over a decade.  If Fed cuts soon enough which the market is now expecting two in 2024, followed by a few more in 2025, we are likely on track to see fixed rates (as well as SORA) hurl towards the 2 percent mark which is not far off from its historical low levels.

This whole process of reversing out the earlier hikes could even happen in double-quick pace in event of another economic crisis in 2025.  Never say never.  We live in such uncertain times with a U.S. debt crisis, China’s deflation and housing woes, geo-political tensions and wars in more than a few regions threatening disruptions.

Instead, fixed rates went on a protracted downfall since, with more than 150 basis points drop all the way to the current 2.88 per cent for average-sized loans of above S$500,000.

The Trump Factor

Of course, there were analysts projecting that the Fed would need to bring back and hike as many as five more times in event of a second Trump’s presidency given his rhetoric on tariffs.

Yet, other observers have pointed out that it’s exactly the same tariffs enacted in 2019 by Trump which threatened global growth so much so as to cause enough concern for the same Fed under Jerome Powell to cut rates three times in 2019.  What was then famously known as insurance cuts.

So, will the tariffs cause interest rate to rise or to fall?  Don’t be too certain yet.

Best Course of Action

Like what we always advocate, there’s a reason why it’s called interest rate cycle and not an interest rate irregularity or one-off.  It tends to repeat, and repeating in almost perfect peaks and troughs through the years if you zoom out into the decades.

No one has the crystal ball, so the best thing you can do is to stay agile and we have been saying that since the start of 2023 which is still very much relevant today and largely proven to be right.  Clients who signed fixed rates with conversion features after 12 months were happy they can do something about the fixed rate year in the second year of their loan which seems too high now just after a year.  Instead of getting stuck with 3.88 per cent, many were glad they get a chance to reprice now to another lower fixed rate at 2.88 per cent.  Who knows if we will get to 1.88 per cent another year down the line?  Be warned.

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