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When To Use Fixed Rate

StanChart is the only bank left to offer a 1% home loan, and a truly genuine offer with no lock-in, as all the other banks have now stopped their promotion at end of October. So quickly grab it before it pulls the plug when the quota is met.

It is still anyone’s guess how rates would move in 2017. As we are count down to the final week before the US Presidential election on 8 Nov, that outcome in what seems now a tightly-contested race along with ripple effect of a “Hard Brexit” next year are two central themes for global economy in 2017. And let us not forget while all eyes are on economic data coming out from US, the other half of the world is mired in negative rates as Japan concedes defeat once more to its aim of raising inflation to 2% and now pushes back by 2 more years the deadline for achieving that.

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Although it may seem quite likely now that there will be one to two round of rate hikes starting with one next month (Dec 2016 FOMC) with the odds of that happening rising to 70% or higher especially if Hillary wins, anything can still happen with historic events of Brexit still vivid in our minds. This brings us back to the question of what should a homeowner do when seeking refinancing at this juncture – take a floating rate 1% loan like StanChart’s latest offering, or quickly lock down a fixed rate before interest rises? One common question we often get these days which we will attempt to answer in this article – if one chooses not to fix the mortgage rate now at current lows of 1.50-1.60%, he will end up fixing it later at higher levels as it would have risen back to the previous 1.80-2.00% level or higher.

There is certainly some truth in that. To decide, there are at least two obvious factors to look at – the loan quantum, and the differentials between fixed and floating right now. There is no right or wrong which is why we also advocate fixed rate for certain group of clients at the moment but for that we say go for the absolute lowest fixed rate which will be more a 2-year fixed rather than 3-year. And one bank now offers 1.40% indeed, for private properties only, for a 2-year fixed rate. Still with rates expected to rise up so slowly in 2017 and with StanChart’s irresistible offer at 1%, one is almost certain to save in the first year especially for bigger loans even if we factor in a 25 basis point rate hike to 1.25% by 1st quarter of 2017. Many believe that it would take a few more quarters of solid labour market data before the Fed will consider hiking again possibly towards end of 2017.

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We think the best time to lock down fixed rate is when it becomes almost certain that rates are on its way up. And given how events have unfolded in the past year (interest rising in 1st quarter and then start crashing down again for the rest of the year especially post-Brexit), that might mean allowing US Fed to hike twice before making this switch to fixed rate. In other words the best time to switch to fixed rate might be towards end of 2017 or early 2018, if events pan out as expected. Yes we think it might be wise to wait for the next hike to happen first, even if Fed should hike next month, as a sort of confirmation if you like that things are indeed looking up. That is also one key reason why we think the 1% loan from StanChart appears to be an excellent choice, as even with a December rate hike, one will be still paying just 1.25% for the next one year (if we suppose 3-month SIBOR and all bank deposit rates rise by the same magnitude of 25 basis points).

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*Note: Due to overwhelming response, a 2-year lock-in has been introduced with effect from 23 Nov 2016.  Find out how we get you a better overall deal in a MortgageWise Special when you apply through us.

The only downside to this strategy is the higher fixed rate by end 2017 to early 2018 as pointed out earlier, possibly slightly above 2%. However do not forget in the meantime one would have saved big in the first year on a super-low floating rate. And even after the first year, the rate continues to stay low with a constant spread at 48FDR + 0.90. The DMR (Deposit Mortgage Rate) of 48FDR would have to double from its current 0.50% to 1% and more for the final rate to go above 2%.

Another key consideration is this – will one rather lock-in 2-year fixed rate at 1.40% today when interest is still trending flat and have it expired at end 2018 when rates have already moved up a few notches, or to lock-in a longer 3-year fixed rate at say 2% at end of 2017 when it has just started to move, and more importantly when most of the global uncertainties from Brexit to oil rout are out of the way?

Speak to our consultants today to find out more about a MortgageWise Special we have put together for clients taking up the 1% loan from StanChart through us today!

 

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 successful careers in banking & real estate before becoming an entrepreneur.
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