The United States Federal Reserve has signalled that it’ll hold off interest rate increases, which isn’t a surprise given how the global economy has taken a big blow from the unexpected COVID-19 pandemic. Many have expected the low interest rate environment to continue on in the foreseeable future.
However, what’s surprising is the rising interest rates for mortgage loans lately.
In the past few months, mortgage interest rates have been inching upwards and this trend is likely to persist – both in the United States and Singapore, which will affect all home owners.
How are interest rates in Singapore tied to the United States?
As a small country, we’re a price taker.
Unlike other countries where lending rates are typically dictated by the central bank, mortgage loan interest rates in Singapore are determined by the Singapore Overnight Rate Average (SORA).
Interest rates movements in the United States will therefore influence the SORA in Singapore, which affects local mortgage loan lending rates.
Why are interest rates for mortgage loans in Singapore rising?
With various government stimulus, the rolling out of vaccinations, and many countries successfully controlling the number of COVID-19 cases, economic growth is slowly picking up. Market expectations are starting to become more optimistic.
Interest rates for home loans in Singapore, in turn, are increasing due to these optimistic market sentiments.
How does high interest rates affect your home loan in Singapore?
Singaporeans have enjoyed very low bank lending rates ever since the Feds slashed interest rates the previous year. Many have been able to get a mortgage loan for close to 1 per cent.
However, over the past months, these rates have been creeping up and they are now closer to 1.3 to 1.5 per cent.
When interest rates go up, the debt service burden will also increase. Home owners, especially those in the lower income group, will find it more challenging to service their existing mortgage payments.
Consider a family with a combined take-home pay of S$7,200 a month (figures tagged to the median salary of a Singaporean). The family has the following monthly expenses:
· Food and living necessities: S$3,000
· Recreation: S$1,100
· Mortgage payment: S$1,000
· Insurance: S$800
· Utilities: S$420
· Education: S$300
· Transportation: S$300
· Medical: S$200
With a rise in interest rates, their mortgage payment will likely go up to more than S$1,000. While discretionary spending like recreation can be further reduced for this family to have a comfortable cash flow, it will prove to be much more difficult for lower-income families.
Types of home loan packages from banks in Singapore
Competition for home loan packages is stiff amongst banks in Singapore. They use different ways, including promotions on interest rates, to entice home owners to sign a home loan package with them. The banks will offering home loans at similar, yet varying interest rates.
The two most popular rate offerings for home loan packages are fixed home rates and floating rates.
· Fixed home rates: The interest rate that you pay for your home loan will remain the same for a specific time, depending on the duration of your lock-in period.
· Floating rates: Subject to slight variations in interest rate throughout the loan tenure due to market and economic fluctuations.
Should you be worried about rising interest rates affecting your mortgage loans in Singapore?
Although interest rates in Singapore have been creeping up to 1.3 to 1.5 per cent, it is still considered low compared to past interest rates during the pre-COVID era.
So for now, no, you don’t have to be too worried.
However, you should still review your home loans if you haven’t done so because
1) You may be paying more to borrow your loan than necessary and
2) It’s best to lock in a low rate now before the interest rates continue to climb back up once the economy fully recovers.
For home owners still on your HDB loan, you can easily switch to a bank loan because there is no lock-in period for a HDB loan. The current prevailing interest rates offered by banks in Singapore are still much lower than the interest rate of 2.6 per cent for a HDB loan.
For others whose lock-in period is ending, your home loan interest rate will likely increase or change to a floating rate.
It’s time to take advantage of the current low interest rate environment and refinance your home loan to a cheaper mortgage in Singapore. You can enjoy immense savings and greatly improve your household’s cashflow during these difficult economic conditions.
Looking for the right mortgage loan in Singapore?