SINGAPORE – Home owners will have to brace themselves for higher interest rates for home loans – whether floating or fixed – as rates in the United States go up.
The US Federal Reserve raised rates by 25 basis points this week, and has signalled that there will be more hikes this year.
Interest rates in Singapore are tied closely to the US’ due to the Republic’s open economy, in which banks conduct a lot of operations in international markets, where the greenback is the main currency.
The hit to the pocket has already started, with fixed mortgage rates climbing since the fourth quarter of last year, noted Mr Nelson Neo, head of home financing solutions at DBS Consumer Banking Group.
He said rate-increase expectations have resulted in an across-the-board rise in fixed home loan rates.
Mr Clive Chng, associate director of mortgage broker Redbrick Mortgage Advisory, said three-year fixed interest rates were at 1.15 per cent a year back in Q4, and are now at 1.85 per cent.
Floating home loan rates have, however, not moved much so far.
As an example, the three-month compounded Singapore Overnight Rate Average (Sora), the new benchmark for floating mortgage rates, has stayed around 0.2 per cent since its low of 0.07 per cent in July 2020.
Mr Chng said the spreads have stayed steady at about 0.75 percentage point to 0.85 percentage point above Sora.
What this means is if your loan is tied to a three-month compounded Sora, and the Sora rate is 0.2349 per cent as at March 17, your floating interest rate is 0.9849 per cent, if the spread is 0.75 percentage point.
Compared with the three-year fixed rate of 1.85 per cent, the floating-rate package is about 0.87 percentage point lower.
OCBC Bank’s head of consumer secured lending, Ms Phang Lah Hwa, said fixed-rate packages are traditionally more expensive than floating-rate types because of the certainty it offers customers.
She added that the difference between the pricing of fixed packages and that of floating types is usually more than 0.3 percentage point, and will increase as the term of the loan increases.
Ms Phang said: “In a rising interest rate environment, this difference also widens as banks hedge against the rising rates.”
Still, Redbrick’s Mr Chng feels that the gap has grown too wide. He said “generally, floating rates are expected to be priced 0.3 percentage point to 0.4 percentage point below fixed interest rates”.
He believes that Sora will go up as US rates rise, and expects floating mortgage rates to catch up with fixed mortgage ones.
Fixed mortgage rates are also expected to continue rising, Mr Chng said.
“In mid-2019, we saw three-year fixed rates hit a high of 2.88 per cent, so there is a potential that we would see fixed interest rates hit those levels.”
In anticipation of much higher rates, some home owners have refinanced their loans early to lock in a lower rate.
Mr Derrik Ling, 43, had his loan repriced in January at a fixed rate of 1.35 per cent for two years. He said that he will negotiate the rate again in early 2024 when the lock-in period ends, and is open to either a fixed or floating rate loan, depending on which is more attractive at that time.
Another home owner, who declined to be named, managed to borrow more as the value of her property increased.
She fixed her loan at 1.35 per cent for two years.
However, others, like 29-year-old Kelly Chiew, a manager, will be confronted with rising rates as she cannot refinance the two-year fixed-rate loan she took last year yet.
She said she may engage a mortgage broker to refinance her property later when her lock-in period ends.
But even with higher interest rates, bankers are not concerned the development will derail the property market.
Singapore’s property market had a record year in 2021.
The market has slowed as December’s cooling measures and the higher stamp duties for second-time home buyers and foreigners hit home sales in February.
Home sales fell 22.5 per cent to the lowest level since May 2020, Urban Redevelopment Authority (URA) figures showed.
Mr Derek Tan, head of property research at DBS Group, said mortgage rates are at a low base of less than 2 per cent currently.
He added that he would be more concerned if rates start to head towards the 2.5 per cent to 3.5 per cent range.
Banks determine loan quantums at the 3.5 per cent rate, and any rate below that is manageable, he added.
Together with December’s cooling measures, these macro-prudential measures will ensure home buyers are not overleveraged.
Ms Merlyn Tsai, head of consumer banking and digital at CIMB Singapore, said as long as there is wage growth and employment opportunities here, “the rising cost of borrowing is less a source of concern for policymakers because the household debt as a percentage of our GDP (gross domestic product) is still very manageable”.
Still, in this environment of rising interest rates, what should a home buyer do?
More appear to be looking at fixed-rate loans, confirms DBS, which said it has seen a rise in inquiries for such packages.
Mr Neo, said: “This is largely due to home owners seeking greater peace of mind by choosing stability in their home loan repayments and locking in current fixed rates.”
There is a caveat.
OCBC’s Ms Phang cautioned that fixed-rate packages usually incur penalties when a home owner redeems or pre-pays the loan during the lock-in period.
“You should only consider fixed-rate loans if you are not intending to pay down your mortgage or sell your property in the next few years. Otherwise, you may opt for the floating packages with a shorter or no lock-in period,” she said.
UOB’s head of group personal financial services Jacquelyn Tan said Sora-pegged floating loans offer home buyers more transparency in their monthly loan bills, “as the Sora rate is calculated based on historical transactions, and is hence more reflective of market conditions”.
UOB has extended more than $4 billion of Sora-pegged home loans since launching this offering in December 2020.
Whether home buyers take up a fixed- or floating-rate loan, a spokesman for Standard Chartered Bank advises them to “always review the current economic outlook along with their personal circumstances before deciding on what is the most appropriate package”.
For those thinking of refinancing their loan packages, they have other factors to consider. Refinancing means they repay their current loan and take up a new one with another bank.
Ms Phang said they should check if there are “any pre-payment penalties, cancellation fees, or any other fees that they have to pay when they redeem their loan”.
Alternatively, home owners can consider repricing – by switching to a new home-loan package with the same bank.
A Maybank spokesman said: “Repricing with the existing bank is a simpler and faster process, a consumer should compare what rates he or she could reprice into, before considering refinancing with another bank.”
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