1-month SIBOR has just dipped below 1.70% for the first time in a long while – to 1.68550 (as of 16 Jan). 3-month SIBOR is trading at 1.74037 with the gap between the two widening just a little.
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In line with our forecast for 2020, SIBOR is pretty much going to trade in a narrow band. With 1.60 as the floor, as that’s the level we expect 3-month SIBOR to settle at after three rate cuts in the US, but it didn’t quite get as far in 2019. The ceiling would be somewhere at the 1.80 level as there’s really no pressure for SIBOR to go up unless US Fed decides to hike suddenly from a pause mode.
Will 1-month SIBOR continue to drop from here? Yes, maybe. But in our opinion – not a lot more, once we get near to the 1.60 level. We have to watch if it bounces back up above 1.70% or just settle at this new lower level.
This is going to be a short piece as we have just published our forecast for interest rates in 2020. For those with lock-ins expiring within the next six months, here’s what we think:
1. Floating Rate Pegged To SIBOR Makes Sense
This was what we advocated since Jan 2019 when fixed rates were at 2.48%! And we still stand by it. Even though you may not start off with the absolute lowest headline rate in the first year.
What’s certain is that you would’ve managed to lock down the lowest spreads on a market-based mortgage peg in the long run. We’ve never seen SIBOR spreads this low for the past decade. It was even lower for those who lock it down in 2019 on our advice.
And the savvy ones who understand banking business knows it’s all about the spreads. You will be a big winner here if the scenario of a global recession by next year materializes.
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2. Fixed Rates May Still Drop But Not A Lot More
As fixed rates have crashed 70 basis points in 2019 (started the year at 2.48% and ended at 1.78%), it cannot go down too much from here. With 1-month SIBOR now dipping below 1.70%, we expect fixed rates to soon drop down to 1.75%.
When the cycle reverses, apparently this is what you get – fixed rate lower than floating rate. And banks would all be hastily urging you to sign on the dotted line for fixed rates before it drops again, further squeezing their margin. That’s been the story playing out for 2nd half of 2019 and remains likely to be the same for 1st half of 2020.
However, I believe we are near the bottom so we have been advising our clients – it’s ok to go with fixed rates below 2% or even below 1.80% now, as long as one is aware there’s still some downside to fixed rates, albeit limited.
3. Stay Nimble With Shortest Lock Possible
We have explained in our earlier article. No one has the answer to that big debate – is this mid-cycle adjustment by Fed or end cycle reversal? We will know the answer in two years, on hindsight. For now, whether you choose to go with fixed or floating rate (and that’s really not too crucial), the best thing to do is not to lock yourself for too long. So, a 2-year lock-in period is preferred over 3-year. Or better yet, a 1-year lock-in, if that’s available at a reasonable rate.
Speak to our expert team of mortgage consultants who can share with you more ideas on what’s the best stratety for refinancing or taking up of a new purchase loan.
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