Why working with the right mortgage broker is more than just comparing interest rates?

You may think it’s about saving that average 0.20% difference in interest costs by comparing and switching home loan packages. Some even choose to give up that savings and simply reprice with the current bank to save all those hassle and paperwork.

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However, partnering with a professional mortgage broker goes beyond merely comparing interest rates.  It’s about how do you profit from the interest rate cycle over time!

To give you analogy with a recent case, we helped one client secured financing to buy a commercial hdb shophouse in bukit merah back in February of 2021 at S$1.6m.  Though he paid through the roof in commercial interest rates that went as high as 6 per cent this year, valuation on the same hdb shophouse unit today has skyrocketed to S$4.5m!  A 3-fold increase if he were to sell it.

Often in life, timing is everything.  What you do at different stages of the cycle determines whether you hit home run or you score only small wins.  It’s during times like a covid-induced recession in 2020-2021 that you can snatched great bargains.  As far as property market is concerned, you probably have to wait for the next big recession that wipes out enough jobs before prices could correct.  Similarly, U.S. Fed probably has to hike rates far enough to trigger a recession and massive layouts before they can successfully curb inflation, which comes down typically six months into a recession.

Many people do not appreciate the outsized impact of Fed policy on the equities market.  Besides mortgages, interest rate cycles can tell you a lot about what to do with your investments.  And the best way to track the cycle is to work with the right mortgage broker.  No one else tracks it as closely as us.

Let me explain.

There are two interest-sensitive sectors in the economy – banks and S-REITs (Singapore real estate investment trusts).  Collectively these two sectors form a sizeable chunk of the daily trading volume on SGX.  Many investors and retirees own REITs for income from DPU, as well as blue-chip stocks of the three local banks for its high dividends payout.

The chart below shows the correlation of these two sectors against the interest rate cycle.  We use DBS and CICT (Capitaland Integrated Commercial Trust) as proxies for the two sectors.  To better see the correlation on the same axis, we imagine a 5-for-1 share split on DBS stock price which means dividing its actual share price by 5 in this chart.

When mapped against the U.S. Fed funds rate (black line), there is certainly strong correlation with DBS (red line) as the bank’s NIM (net interest margin) is driven more by the interest rate environment than competitive foreces.  Even its fee income is in many ways determined by how buoyant is the economy (card spending) and financial markets (investment activities).  

When Fed cut rates due to economic contraction or recession, banks’ earnings come down along with the need to make higher provisions for credit losses.  A double-whammy.  So, there’s no prize for guessing which way bank share price will move when Fed finally pauses (very soon) and cut rates.

When it comes to a mall-based REIT like CICT (green line), the traditional view that they will perform badly when interest rate goes up and vice versus has been dismantled when you look at the correlation here.  Even though REITs are highly-leveraged structures, there are many moving parts at play.  In fact, mall-based REITs tend to correlate positively with interest rates: even when interest is rising, a bustling economy can lead to high rental reversions and higher DPU when financing costs are well-hedged onto fixed rates (81% of borrowings on fixed rate for CICT as of 31 Dec 2022).  The price swings for REITs are less volatile which is expected as it’s trading more like a property rather than PE multiple stocks.  REITs are in essence property-holding companies or structures.

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Often in life, timing is everything.  What you do at different stages of the cycle determines whether you hit the home run or you score only small wins. 

There are many ways to read this chart and draw your own conclusions and thesis.  We are not qualified to give investment advice.  We are only providing you the data points and bring your attention to how interest cycles has significant impact on certain sectors. After all, we have nothing to gain from this other than the hope that you will work with us when it comes to managing your mortgage costs through the cycles. That’s our forte.

To simply think that you should buy bank stocks when interest is going up is too simplistic a conclusion to draw.  We like to share our own takeaways from this chart:

1. When interest stays in doldrums for long periods, stocks tend to perform well in all sectors including bank stocks.  When interest rate picks up in a tightening cycle which typically last three years (except the current cycle which is on a “fast-forward” mode), banks tend to do well or at least holds up on its share price.  And when interest comes down eventually foreshadowing a faltering economy, bank stocks almost always come down
2. One plausible rotation investment strategy then involves: (a) selling out of bank stocks when the cycle peaks (b) transferring those funds to fixed deposits which will be paying the highest risk-free interest rate at cycle peak OR to mortgage interest-offset accounts while waiting (c) buying back bank stocks when the cycle hits a certain low point (d) repeating the process and going back to point (a).
3. Knowing at which price point to buy back the same bank stock is that million-dollar question which we can’t advise you.  But you will note it’s a general upward-sloping longer term trend line (on DBS) when you plot one through the cycles.
4. For investors looking for income, REITs may provide a much higher yield than fixed deposits when interest cycle is in the troughs.  But you may miss certain capital upside in stocks during this period especially if you invest in technology counters in the S&P and Nasdaq. In fact, you might want to make pre-emptive positioning through incremental buys even before Fed pivots.

The best way to monitor interest rate cycle is to work with the right mortgage advisor.  Start a professional relationship and let us be your trusted advisor today, beyond just mortgages.

So, the next time you decide to simply reprice and stay with your bank, think again.  You may also be passing up opportunities to work with a mortgage professional to profit from the interest rate cycle.  Banks certainly will not call you ahead of time to review your loan as well.

Pareto’s 80:20 rule best captures this – there are only a few decisions in life which can make significant impact to your financial health.  And I suspect most of these decisions have got to do with cycles.

Need more advice?  We don’t just throw you a set of rates, or get different bankers to sell to you.  Not only do we help clients navigate through Singapore mortgage rates quick and fuss-free, we show you how best to position and profit from the interest rate cycle, be it for residential or commercial property loan. Work with us today and you’ll also be helping to support our social cause!

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Disclaimer: MortgageWise.sg endeavours to bring the best insights and knowledge in our expert domain of mortgage planning to the market.  Still, all viewpoints expressed in our blog remain as opinions of the writer, and shall not be constituted as financial advice.  We cannot be held responsible in any way for any financial losses arising from your mortgage decisions should you choose to rely on any of our viewpoints and opinions.