6 Ways US Fed Rate Hikes In 2023 Impact Singapore Home Loans

The Federal Reserve (Fed), the central bank of the United States, is often considered the world’s central bank due to the extensive use of the US dollar in international transactions. When the US Fed hikes its’ interest rates, it sets a global benchmark. When people talk about the US Fed rate hikes, they refer to the increasing federal funds rate in the US.

Since early 2022, the Fed has started adjusting the federal funds’ target range. The federal funds rate is the most important benchmark for interest rates in the US economy—and it influences interest rates in other countries, including Singapore.

The relationship between US Fed interest rate hikes and mortgage rates is complex but highly relevant for Singaporean homebuyers. Being aware of how changes in US interest rates can impact homebuyers in Singapore can help individuals make informed decisions in the property market.

In this article, we will discuss six essential things Singaporean homebuyers should know about the US Fed interest rate hikes and how they can influence the property market in Singapore.

What is the trend in the US Fed rates?

In July 2023, the FOMC raised the federal funds rate for the eleventh time since March 2022.

FOMC Meeting Date	Rate Change (in basis points or bps)	Federal Funds Rate
July 26, 2023	+25	5.25% to 5.50%
May 3, 2023	+25	5.00% to 5.25%
March 22, 2023	+25	4.75% to 5.00%
Feb 1, 2023	+25	4.50% to 4.75%
Dec 14, 2022	+50	4.25% to 4.50%
Nov 2, 2022	+75	3.75% to 4.00%
Sept 21, 2022	+75	3.00% to 3.25%
July 27, 2022	+75	2.25% to 2.50%
June 16, 2022	+75	1.50% to 1.75%
May 5, 2022	+50	0.75% to 1.00%
March 17, 2022	+25	0.25% to 0.50%

The last interest rate hike marked a 25-bps increase from 5.25% to 5.5%—the highest since January 2001.

Upcoming FOMC meetings this year are scheduled for 20 September, 1 November and 13 December 2023.

According to Trading Economics, the US federal funds rate is projected to trend around 4.75% in 2024 and 3.75% in 2025.

Why does the US Federal Reserve keep increasing interest rates?

The goal of the US Fed is to maintain a balanced US economy—neither too hot nor too cold, but just right. When the economy starts overheating—too much inflation—the Fed raises interest rates, and when the economy looks weak—high unemployment—the Fed cuts rates down. The Fed utilises the interest rate hikes to stabilise the economy, keep inflation in check and keep growth on track.

The FOMC is firmly committed to reducing inflation to its 2% target rate, indicating that interest rate hikes may persist until they achieve this objective.

How does the US Fed interest rate hike affect Singapore?

The Singapore economy is greatly affected by movements and changes in the US dollar. Since Singapore is a small and open economy, local banks, financial institutions and its central bank—the Monetary Authority of Singapore (MAS)—adopt an exchange rate policy as its only monetary policy to maintain price stability.

Since interest rates in Singapore are determined by global interest rates, especially those of the US, hikes in US Fed interest rates result in a similar upward trend in Singapore’s home loan rates. Since most floating rate packages in Singapore are pegged to the Singapore Overnight Rate Average (SORA), any change in the US Fed interest rates results in higher SORA rates.

If FOMC decides to undertake more US Fed interest rate hikes in Q2 2023, SORA rates could increase to a maximum of 3.80% to 4.00% by the end of 2023.

Unfortunately, a large proportion of prospective homeowners in Singapore may become priced out of the housing market as a result of it.

Here’s a chart exhibiting a pretty clear correlation between the US Fed Rate and SORA, the benchmark for all home loans in Singapore.

Fig 1. SORA and US Fed Rates

Fig 2. 1M vs 3M vs 6M vs EFFR

The chart above shows the SORA (1-month, 3-month, and 6-month compounded rates) and the US Effective Federal Funds Rate (EFFR) from January 2022 to May 2023. It’s evident that although the EFFR influences the SORA in an increasing direction, there are no abrupt spikes whenever the Fed adjusts the rate.

The 3-month SORA is a prevalent benchmark by local banks offering floating rate packages in Singapore. The chart above also illustrates that although SORA closely tracks EFFR, their movements have not always been proportionate, particularly since November 2022.

Earlier increases in US interest rates in 2000, 2006 to 2007, and 2019 resulted in similar patterns in Singapore’s interest rates but at a smaller scale.

So, any future predictions?

The members of the US FOMC have predicted at least another 0.5% increase or two 0.25% rate hikes before the end of this year. In other words, it is projected that 2023 will end with the US Fed rate between 5.50% and 5.75%—which means 0.5% higher than where it is now.

Essentially, the Fed is conveying that interest rates will remain at higher levels for an extended period, possibly until at least 2024.

6 Essential Insights for Singaporean Homebuyers Regarding US Fed Interest Rate Hikes

Singaporean homebuyers are not insulated from the far-reaching effects of United States Federal Reserve interest rate hikes. These rate adjustments can have a profound impact on the local property market. These six essential insights will guide prospective homebuyers through this complex terrain:

1. Impact on Mortgage Rates and Borrowing Costs

When the US Fed raises interest rates, it can lead to higher borrowing costs not just in the United States but worldwide. It translates into the possibility of higher borrowing costs for Singaporean homebuyers as the interest rate ripple effect reaches the local banks.

In Singapore, many property buyers rely on mortgages provided by local banks to finance their purchases. When the US Fed raises interest rates, it puts upward pressure on the cost of funds for banks and other financial institutions worldwide. To maintain profitability and cover increased borrowing costs, local banks in Singapore have to raise their interest rates for mortgages and loans.

It is a crucial point for homebuyers to consider as it directly impacts their financial obligations when purchasing property. Those who can’t or don’t want to afford the higher monthly mortgage payments might delay buying a home or opt for one that requires a smaller mortgage to reduce their monthly repayment.

The Implication for Homebuyers

Implications of higher mortgage rates and borrowing costs for Singaporean homebuyers are multifaceted and include:

i. Higher Monthly Mortgage Payments: Perhaps the most immediate consequence of raising mortgage interest rates on homebuyers in Singapore is on monthly mortgage payments.

For those with existing mortgages, a surge in mortgage rates can translate into an increase in the monthly repayment amount. Singaporean homebuyers must be prepared for higher monthly obligations when acquiring property during a period marked by rising US interest rates.

ii. Affordability Challenges: Hikes in mortgage rates can significantly affect the affordability of homes in Singapore. As the cost of borrowing increases, some potential buyers may reconsider their plans to purchase real estate. What was once considered an affordable loan amount may now qualify prospective homebuyers for a less expensive or smaller property due to more significant monthly repayments.

The influence of hikes in US Fed interest rates on mortgage rates and borrowing costs underscores the importance of timing, affordability assessments, and financial planning when navigating the property market landscape, especially during fluctuating interest rates.

If you are a potential homebuyer and planning to buy a property during a rising US interest rate environment, prepare yourself for higher monthly mortgage payments.

2. Affordability and Home Loan Eligibility

Apart from mortgage rates, the consequence of US Fed interest rate hikes extends further to impact the affordability of homes in Singapore. This aspect is of paramount importance to homebuyers, as it determines not only the size of their investment but also the scope of their property choices and financial flexibility.

The Tug-of-War Between Mortgage Rates and Affordability

i. Higher Mortgage Rates and Monthly Repayments: As discussed earlier, US Fed interest rate hikes can lead to higher mortgage rates. When these rates rise, so do the monthly repayment obligations for homebuyers. Homebuyers may face a more substantial financial commitment for the same loan amount every month.

ii. Impact on Affordability: The direct implication of higher monthly repayments is a potential reduction in the affordability of homes. What was once a comfortably affordable property may now require a larger portion of the buyer’s monthly income.

This shift can be challenging for many homebuyers, especially first-time buyers and those with limited budgets. They may need to consider alternative neighbourhoods or property types that offer more value for their budget.

Consequences for Homebuyers

For Singaporean homebuyers, higher mortgage rates can significantly restrict the range of properties they can consider. Homebuyers who previously had their sights set on a particular type or size of property may need to recalibrate their expectations and explore less expensive or smaller options.

An increase in monthly repayment obligations can also lead to financial stress for some homebuyers. Stretching one’s budget to cover higher mortgage payments can strain household finances and impact the quality of life.

In conclusion, the impact of US Fed interest rate hikes on the affordability of homes in Singapore is critical for homebuyers to consider. The interplay between mortgage rates, monthly repayments, and property choices underscores the importance of careful financial planning.

3. Impact on Property Financing and Loan-to-Value (LTV) Ratios

Dependency on Financing for Property Purchase

Singaporean homebuyers often rely on financing options to purchase property. These financing options allow buyers to spread the cost of property acquisition over an extended period, making homeownership more accessible.

Singaporean banks may also raise their lending rates when US interest rates rise. That, in turn, can make it more expensive for homebuyers in Singapore to secure financing for their property purchases.

Potential buyers should carefully consider their financing options and be prepared for higher interest costs if they intend to purchase property during a period of US Fed interest rate hikes.

Seeking guidance from financial advisors can be invaluable, especially when structuring loan packages and financing strategies aligned with a buyer’s financial goals.

The LTV and Rising Mortgage Rates

Singapore government has implemented measures to regulate the property market, including Loan-to-Value (LTV) ratios. LTV ratios determine the maximum loan amount a homebuyer can borrow relative to the property’s purchase price. LTV ratios also guard borrowers against excessive debt, which could lead to a significant financial burden and affect a buyer’s ability to enter the property market.

Consequences for Homebuyers

When the US Fed’s interest rate rises, local banks in Singapore may react by adjusting their lending policies to mitigate potential risks. Rising mortgage rates may lead to lower LTV ratios. Homebuyers may need to channel their savings into providing a more substantial down payment upfront to secure the same loan amount to meet lower LTV requirements. It impacts their overall financial stability.

With a larger portion of their capital tied up in the initial down payment, homebuyers may find fewer property options within their budget range. This limitation can influence choices regarding the location, property type, and size.

In conclusion, the impact of US Fed interest rate hikes on LTV ratios in Singapore is a vital consideration for homebuyers.

They should understand the implications of potential changes in LTV ratios and prepare accordingly. It helps homebuyers navigate these challenges and make informed financing decisions when entering Singapore’s dynamic property market.

4. Currency Exchange Rates and Foreign Property Investments

Understanding how the US Fed interest rate hikes can impact currency exchange rates is crucial for Singaporean investors eyeing properties abroad.

The Global Currency Conundrum

i. Interest Rates and Exchange Rates: The relationship between interest rates and exchange rates is intricate. When the US Fed raises interest rates, it typically strengthens the US dollar (USD) relative to other currencies. This phenomenon can have far-reaching implications for Singaporean investors making property investments in countries where properties have prices in USD.

ii. Impact on Conversion Costs: A stronger USD translates into higher conversion costs for Singaporean buyers considering foreign property investments. When converting Singapore Dollars (SGD) to USD to fund property purchases, they receive fewer USD for every SGD. That can substantially affect the overall cost of the investment.

Consequences for Foreign Property Investments

A stronger USD effectively makes foreign property investments priced in USD more expensive for Singaporean homebuyers. It can impact the feasibility and attractiveness of such real estate investments.

Additionally, if the USD appreciates significantly during the holding period of the property, the eventual sale proceeds, when converted back to SGD, may be lower than expected.

In conclusion, the impact of the US Fed interest rate hikes on currency exchange rates is a pivotal consideration for Singaporean buyers eyeing foreign property investments. It underscores the importance of thorough financial planning, risk assessment, and hedging strategies to mitigate currency risk.

5. Economic Growth and Job Market Stability

As Singapore’s economy is closely linked to global markets, a slowdown in the US economy can have spillover effects on Singapore’s job market and overall economic health.

US Fed’s Role in Economic Control

i. Inflation Control: The US Fed utilises interest rate adjustments as a potent tool to manage inflation. Raising interest rates can cool down an overheating economy and prevent prices from soaring uncontrollably. Conversely, lowering rates can stimulate economic growth during periods of stagnation.

ii. Stabilising the US Economy: Interest rate policies serve as a mechanism to stabilise the broader US economy. Interest rate hikes are intended to slow down economic growth, thus preventing it from becoming unsustainable and prone to bubbles and crashes. A slowdown in the US economy can trigger a cascade of repercussions that reach Singapore’s shores.

Impact on Job Creation

An economic slowdown in the US economy can have repercussions on the job market. Reduced economic activity can lead to reduced business investments and hiring, potentially affecting employment opportunities in Singapore and abroad.

Consequences for Homebuyers

The overall health of the job market and the economy is a key driver of property demand. A stable job market and robust economic conditions generally encourage property purchases. Conversely, economic uncertainty can lead to cautious spending and a slowdown in property demand.

Similarly, property prices are closely linked to their demand. A slowdown in the economy and job market can lead to softer property prices or, in some cases, price stagnation. Buyers may find favourable conditions during such periods if they have enough savings.

In conclusion, Singaporean homebuyers should keep abreast of economic indicators – domestic and global – such as employment rates, GDP growth, and consumer confidence to gauge the health of the economy. Homebuyers should consider how economic stability or uncertainty may impact their property investments and other financial goals.

6. Investment Alternatives and Diversification

As the US Fed interest rates rise, they can trigger a reevaluation of investment strategies among Singaporean investors, potentially reshaping the property market landscape.

The Allure of Alternative Investments

In a rising interest rate environment, alternative investments such as bonds or high-yield savings accounts may become more appealing than real estate.

As fixed-income investments often offer higher returns than real estate in a rising interest rate environment, some Singaporean investors may divert their funds from the property market into these alternatives.

This shift in investment preferences can influence property market dynamics. Real estate may become less competitive as an investment option compared to other asset classes, potentially leading to softer demand and more stable or even declining property prices. While this may create opportunities for buyers, it poses some serious challenges for those looking to sell property.

Diversification as a Strategy

Diversification involves spreading investments across various asset classes to mitigate risk. Investors should consider diversifying their portfolios to balance exposure to real estate with other assets, especially in changing market conditions.

Diversification can help investors achieve a balanced approach that accommodates different market conditions. Singaporean investors should align their investment strategies with long-term financial goals.

In conclusion, the impact of rising interest rates on alternative investments and the subsequent shift in investment preferences underscores the importance of diversification as a risk mitigation strategy and the need to adapt to evolving market conditions.

Investors should check on property market trends and economic indicators while staying well-informed about the potential implications of interest rate hikes on various investment options. Seeking guidance from finance and mortgage consultants can provide valuable insights into crafting a diversified investment portfolio that aligns with individual financial goals.

Final Thoughts

The US Federal Reserve’s interest rate decisions have a far-reaching impact on the global economy, including Singapore’s property market. Singaporean buyers need to understand how US Fed interest rate hikes affect their mortgage rates, affordability, eligibility for home loans, and investment decisions.

Homebuyers should also consider diversifying their investment portfolios to mitigate risks associated with interest rate fluctuations and economic uncertainties.

At Dollarback Mortgage, we understand that navigating the intricacies of the property market can be daunting, especially with the influence of US Fed interest rate hikes. Our dedicated mortgage specialists are here to simplify the process for you, providing expert advice and helping you compare the lowest housing loan interest rates in Singapore.

Whether you’re embarking on the journey to buy your dream HDB home or private condo or considering refinancing your existing home loans, we’re here to assist you every step of the way. Your financial well-being and property investment goals are our top priorities.

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