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What To Do When Fixed Rate Go Above 2%?

With 3-year fixed rates now above the psychological level of 2% p.a. with the exception of one bank CIMB, we are starting to see resistance from borrowers in the market so used to rates of sub-2% in the past 7 years since 2008.

Most would then consider locking down a 2-year fixed instead for example Stanchart’s 1.78% p.a. (lowest in the market now but coming to an end as well on 15 Apr) but even that is getting scarce with a few banks pulling out their 2-year fixed rate home loans in recent weeks.

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Looks like we were quite right to predict in early March that in 1-3 months all fixed rates in Singapore will go above 2% p.a. We expect that to happen real soon when 3-month sibor itches up further and probably stabilize in the 1.2 to 1.5% p.a. sideways for a while.

The next more important question is what should borrowers do next?

When sibor starts rising from 0.60 level since the turn of the year and with more than 80% of the mortgage market in Singapore on floating rates notably sibor and sor, it comes as no surprise everyone who is out of a lock-in period will swiftly look for a fixed rate to hedge against rising interest costs. And at MortgageWise, we have started advocating that since last October as long as fixed rate stay below 2% and it is really a no-brainer when the gap between fixed rates and floating were that close – usually less than 30 basis points (or 0.30) or sometimes even at the same level for some clients.

The guessing game becomes more difficult now as we are about to cross the psychological barrier of 2% p.a. for fixed rates and against a backdrop of tepid global growth albeit gaining traction in North America. The question is – is it wise to lock down say a 3-year fixed rate home loan at say 2.28% now, what if some event triggers another economic crisis and rates come tumbling down again? Or what about the possibility that sibor trades sideways for the next few years after stabilizing at the 1.2-1.5% level as we have stated earlier, especially after the first lift out in US. After all no one is expecting that sibor will continue to spike up at the same rate in the last 6 months and reach 3% in the next 2 years, or is there?

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Over at MortgageWise, we think it is ok to go slightly over 2% as there will still be savings. The reasoning is simple. We have quietly observed there seems to be margin that most banks’ treasuries are maintaining between their cost of funds and fixed rates holding that more or less in the region of 100-120 basis points or 1.0-1.2% as sibor rises. For example when 3-month sibor was at 0.6 at start of the year, 3-year fixed rate by local banks were hovering at the 1.7-1.8% range. Now when sibor hits 1%, the fixed rates is at 2.1-2.2% range. Surprising foreign banks who depend more on interbank lending for funds are doing better in terms of fixed rates consistently which can only mean local banks are making more money from mortgages as they come from an even lower cost base with their branch network and extensive local deposits base.

There is no prize then for guessing when sibor stabilize at 1.5% possibly by end of the year, what are the levels for 3-year fixed rates – 2.6-2.8%. Floating rates are mostly on spreads of 0.85 to 1.25% hence by then most in the market will be paying 2.3-2.7%.

In conclusion if you are to lock in fixed rates at 2.2-2.3% level now, it may seem high now or for the next 6 months, but once sibor hits 1.5% level before end of the year (or soon after the first interest rate lift off in US) you would be smiling, as you would have locked in at the lowest end of the range for the remaining 2.5 years of your 3-year fixed period. You will enjoy substantial savings especially for loans above $1M.

Beyond that point it is more difficult to decipher the next course of actions. We think sibor will still be on an uptrend from 1.5% but the pace will be at a much slower and more sustainable rate so as not to derail the global recovery. At the end of your current fixed rate term, you may or may not go into another fixed rate mortgage depends on this pace. Watch this space as we continue to monitor the trends and deliver useful insights and conclusions.

At MortgageWise.sg, we seek to be your home loan Singapore solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner when you buy condo Singapore. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

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