lady looking shocked with her mortgage statement

Will 2022 Be A Year Of Shock & Awe On Interest Rates?

We heard that term “shock & awe” bandied around in recent reports on the upcoming Fed meeting in March where the market has now fully priced in a lift off in rates.  Shock & awe refers to the use or display of overwhelming power to cripple whatever one is battling.  And some analysts are predicting that Fed will do just that with a 0.50% increase in one fell swoop come March meeting – to show its resolve to battle its No. 1 enemy at the moment – inflation.

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Our question to homeowners takes on even more significance beyond just one FOMC meeting: Will 2022 be the year of shock & awe on interest rates where we see it move up by more than the usual one full percentage points (1.00%) increase typically in a year (0.25% hike per quarter). 

If inflation worsens in the U.S. by 1H of the year (many expected that) and Omicron wave fades quickly enough, that’s certainly a strong possibility.  And if we assume Fed is to hike by more than its usual pace, this means Fed will have to quickly jack up interest rate at least 1.50% to have that shock & awe effect?

If that scenario materializes, it is certainly of great alarm to the hundreds of thousands of homeowners here. There’s no time to waste.  In about 6-9 months’ time, you’ll find your mortgage repayment every month go up by another $500-1,000.  Take for example a typical private property loan of $750,000 with 25 years more to go at the prevailing floating rate of 0.80%.  You may have gotten comfortable forking out just $2,700 for your mortgage in the past two years.  If you do nothing and if this rate rises by a similar 1.50% to 2.30%, your monthly repayment shoots up to $3,300!  If you think that’s just $600 more, think again.  The interest component, or what goes to the bank as interest income every month, actually balloon from a mere $500 to $1,400 per month!  That’s an increase of almost 200%.

Of course, you’re not going to let that happen.  Even if it means paying back the legal fee subsidy (liable when you refinance out within 3 years) of $2,000 which you can easily recoup in just a few months.  It’s a no brainer.

The hard part is trying to decipher how much of an increase will interest be over the next 11 months of the year.  We probably get a good sense by mid of the year, but will it be too late then to lock down fixed rates below 1.50%?  And that’s the most invaluable part of working with a trusted mortgage consultant giving that forecast since 2014.  That’s right, we have seen a full interest rate cycle by now – a false start in 2015, an upcycle 2016-2018, a downcycle 2019-2020 followed by an interest rate plateau.  Our “10,000 hours” dedication to track macro events, financial news & U.S. Fed has led us to an almost 80% accuracy in our rate forecast.  Here’s the proof.

Starting this year, we’ll only publish our interest rate forecast for the year when it is over.  You’ll need to speak to our consultants to get our current outlook and rate forecast for 2022.  We do that to make sure our insights and quality advice is reserved for those who appreciate the work we do, beyond just vouchers or comparing packages.  Over the last cycle, we have helped many clients achieve paying just 0.50-0.60% over the past 3 years by prompting the switch to floating in 2019 (even before the pandemic); and locking down fixed at 0.95-1.10% with first-mover advantage in Q4 of 2021. (Hint: we sensed the notable change in Fed’s stance since Jerome Powell’s reappointment (over Lael Brainard) for a 2nd term as Fed chair on 22 Nov 2021).

Find out what’s our stance now with mortgage fixed rates having climbed some 30 basis points or 0.30% from its historical lowest point?

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However, to make it worth your read, we do leave you with 4 key themes that we think will determine if 2022 will indeed be a year of shock and awe on interest rates:

1. Will the pandemic end in the year of the Tiger?

The biggest risk (other than geo-political risks like war) we think, is the emergence of another virulent covid-19 variant in 2H of 2022?  We had two VOCs (variants of concern) last year with Delta having a major devastating effect that sets back global economic recovery in 2021.  Just when we thought we’ve seen enough, the speed at how Omicron became the next dominant variant globally in the matter of 1-2 months caught us off-guard.

On a brighter note, the arrival of Pfizer’s Paxlovid (anti-viral pill just approved for use in Singapore) is a major game-changer in our view.  To a lesser extent, the soon-to-be-approved (awaiting US FDA and Singapore’s HSA) Novavax 1st protein vaccine (non-mRNA) will also go a long way to help bring up vaccination rates globally.

The question is: How will the world and global economy cope with another VOC and will there be one in 2022?

2. China’s zero-covid policy: how will it play out?

The supply chain disruptions in China has played out much longer than what most expected – surprising even the Fed to the extent that Fed Chair has to eat humble pie and retire the term “transitory” on inflation.  With onslaught of the more infectious Omicron, China’s zero-covid policy continues to face mounting pressure in 2022.  Will inflation become much worse as the year progress should supply chain situation deteriorates?

3. Omicron wave – picking up the pieces

As what most has expected at end of 2021, Omicron wave passes much more quickly and countries which has managed to keep their health care system intact will emerge largely unscathed.  U.S. economy is now expected to recover from Omicron wave as early as Q2.  Should workers return to the work place in droves, travel demand and consumer spending picks up massively, we can expect inflation pressure to crank up.

4. Fed’s tightening

We’ve always felt that the US$8 trillion of QE liquidity which has underpinned the meteoric rise in the value of stock markets and financial assets has been largely underappreciated by many.  Now that Fed is attempting to suck the massive liquidity out of the system, there will be reckoning for stock markets which we are already seeing.  Traditionally a Fed that’s behind the curve can cause a recession when they slam on the brakes too hard and too fast with too many hikes. And remember severe stock market crashes do lead to financial hardships and poverty for some, reining in consumer spending.  It’s unclear how this will play out over the next few years in a tussle between the Fed and the markets.

Over the last cycle, we have helped many clients achieve paying just 0.50-0.60% over the past 3 years by prompting the switch to floating in 2019 (even before the pandemic); and locking down fixed at 0.95-1.10% with first-mover advantage in Q4 of 2021.

Compare Singapore home loan rates quick, fuss-free and reliably at MortgageWise.sg. If you have benefited from deep insights in our blog, imagine how much more you’ll save from our expert view-points & forecasts which you do not get from anywhere else. We help you to navigate interest rate cycle astutely be it for residential or commercial property loan. Work with us today and help support our social cause too!

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