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Inflation and Rising Interest Rates – How It Affects Your Home Loan in Singapore?

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This article will delve into the intricate ways high inflation and elevated interest rates affect your home loan in Singapore. It will also explore the consequences and practical strategies to navigate these challenging times while making informed decisions.

What happens with high interest rates and high inflation?

According to a new DBS study conducted in July 2023, high inflation and rising interest rates have diminished the purchasing power of Singaporeans — and gig workers and low-income groups are the most affected as their growth in expenses outpaced income growth.

Among the different buyer profiles, first-time homebuyers like newlyweds are younger and likely to be on a tighter budget. They are among the most affected buyers due to the high cost of living and property prices in the current high interest rate scenario. These people will have to wait years for an HDB BTO flat if they cannot afford a resale flat.

The rise in US Fed interest rates in response to inflation has led to higher mortgage interest rates and monthly mortgage payments for households and buy-to-let landlords, hindering Singaporeans from reaching their property aspirations.

In the current high interest rate environment, more Singaporeans are re-evaluating their property purchase plans and delaying their home purchase until prices stabilise and inflation eases.

Will my home loan be affected by inflation?

Over time, inflation diminishes the buying power of your savings. As prices for goods and services rise, the same amount of money will buy less in future.

It means that people need to spend more to maintain their standard of living. In an inflationary environment, prices for essential items like food, housing, healthcare, and transportation tend to rise, leading to higher overall living expenses for individuals and families.

As inflation continues to dilute purchasing power and erode savings, its relentless march has become a significant hurdle for those aspiring to own property in Singapore. Also, with insufficient savings come cashflow woes.

High inflation has influenced the Monetary Authority of Singapore (MAS) to adjust interest rates. MAS may raise interest rates if inflation continues to rise. It can affect floating-rate mortgages as their interest rates are often pegged to benchmarks like the SORA or SIBOR, which move in response to changes in the US Fed interest rates.

First-time homebuyers need to consider how inflation impacts their home purchase, especially when saving for a downpayment. As interest rates rise, mortgage approval criteria may also become stricter. First-time buyers must meet these criteria, including the ability to make higher monthly payments.

Moreover, economic uncertainties, including inflation and interest rate fluctuations, can lead to market volatility. First-time homebuyers may need to carefully time their entry into the market to secure favourable terms.

Consequences of high inflation for those looking to buy their first home

High inflation can have several consequences for individuals and families, particularly those looking to buy their first home:

Reduced Purchasing Power: High inflation means the same amount of money has reduced purchasing power. It can make it more challenging to save for a downpayment while dealing with everyday expenses.

Higher Costs of Living: Rising prices for essentials like housing, food, and utilities can strain household budgets, leaving less money for savings and other financial goals.

Impact on Mortgage Payments: High inflation can lead to higher interest rates for individuals servicing floating-rate mortgages, resulting in increased monthly mortgage payments.

Savings Erosion: Inflation erodes the real value of savings. If the return on savings and investments does not outpace inflation, prospective homebuyers may find it hard to save enough for a downpayment or other financial objectives.

Affordability Challenges: Rising inflation rates can escalate housing prices, potentially making homeownership less affordable for first-time homebuyers. As long as inflation remains a concern, many Singaporeans, including current property owners and non-property owners looking to enter the market, may delay their property purchases.

Individuals and families need to understand the dynamics of inflation, manage their finances prudently, and consider long-term financial planning to mitigate the impact of inflation on their ability to achieve homeownership and other financial goals.

Tips to mitigate the potential impact of inflation on your home loan

  • Consider the mortgage type you choose. For instance, fixed-rate mortgages provide stability in monthly payments (at least for a specific number of years), which can help you budget for the long term, regardless of inflation.
  • Monitor economic challenges and central bank policies to anticipate potential interest rate changes if you have a floating-rate mortgage.
  • Consider how inflation may affect your long-term financial goals, including your home loans and retirement plans.

How does rising interest rates affect my home loan?

One of the most apparent impacts of rising interest rates in a cut-throat and pricey market for first-time homebuyers would be higher borrowing costs for purchasing properties. This situation makes monthly mortgage payments more expensive for some buyers. Prospective homebuyers assess how higher interest rates impact their budget and home affordability.

For those contemplating homeownership, particularly first-time homebuyers, the prospect of further hikes in mortgage interest rates is a strong deterrent. High interest rates take a toll on homebuyers’ balance sheets, especially those with excessive financial liabilities, such as credit card debt and hefty home loans.

On the other hand, homeowners who purchase their homes during periods of low interest rates may face increased vulnerability when rates rise. The mortgage payments can sharply rise when interest rates increase, potentially exceeding their disposable income. It can result in financial stress, increasing the number of mortgage defaults and foreclosures.

Tips on home loan planning in high-interest rate environments

  • If you currently hold a fixed-rate home loan with a high interest rate, consider home loan refinancing with a relatively lower interest rate while considering the refinancing costs. So, you can effectively lower your monthly mortgage payments and save a significant amount of money over the loan tenure.
  • Making partial prepayments towards your home loan can be an effective strategy. Paying a lump sum to your bank can reduce the outstanding mortgage balance. That, in turn, lowers the amount of interest you’ll pay over the life of the loan.
  • In a high interest rate environment, prioritise cash payments for your purchases whenever possible. Opt for upfront payments rather than taking on additional debt. This approach helps you avoid interest charges, freeing up your financial resources for other priorities.
  • Don’t hesitate to negotiate with potential lenders for lower interest rates, especially if you have a strong credit history and financial stability.
  • In a rising interest rate environment, get a pre-approval for a mortgage to ascertain your borrowing capacity and interest rate. It can provide you with a competitive edge when negotiating with sellers.

Will interest rates continue to rise in 2024?

As interest rates have begun moving sideways in the second half of 2023, the narrative on mortgage rates has subtly shifted from whether ‘mortgage interest rates in Singapore will continue to rise’ to ‘when can we expect mortgage rates to decline’.

This shift in perspective stems from the fact that interest rates have started to stabilise in the latter half of 2023. Moreover, the US core inflation rate – a significant global economic indicator – has dipped from 6.5% in March 2022 to 4.3% in August 2023, suggesting the possibility of lower interest rates on the horizon.

While fixed-rate loans were favoured as interest rates climbed rapidly, experts suggest that fixed-rate packages with shorter lock-in periods, such as 1-year or 2-year terms and floating rate packages, may be more advantageous in the current scenario. This approach will allow homeowners the flexibility to capitalise on potential interest rate reductions in the future.

According to Trading Economics global macro models, the Singapore Average Overnight Interest Rate (SORA) will trend around 3% in 2024 and 2.40% in 2025. In September 2023, SORA benchmark interest rate was recorded at 3.81%.

Practical strategies & considerations for overcoming high inflation and rising interest rates in 2024

In light of rising interest rates, first-time homebuyers should focus on understanding how high inflation and increasing interest rates affect their mortgage prospects. Here are some strategies you must look into:

Realistic Budget: First-time homebuyers should adjust their budget to account for the potential impact of rising interest rates and the cost of living due to inflation on their future mortgage payments. Failure to plan for these economic factors can lead to financial strain and potential difficulties in meeting mortgage obligations.

Save Aggressively: Given the eroding effect of inflation on your purchasing power over time, first-time buyers may need to save more aggressively. Allocate a higher percentage of your income to your downpayment fund and explore opportunities to reduce discretionary spending.

Invest Wisely: Diversify your investment portfolio to include assets that have the potential to outpace inflation. Consult with a financial advisor to develop an investment strategy aligned with your homeownership goals.

Consider Fixed-Rate Mortgages: In an environment of rising interest rates, fixed-rate mortgages offer stability by locking in a specific interest rate. It shields you from future rate hikes and ensures predictable monthly payments. Base your decision on your financial objectives and your level of risk tolerance to make an informed choice.

Thorough Financial Assessment for a Successful Home Purchase:

  • Conduct a thorough assessment of your financial situation, including your income, expenses, debts, and credit score, to help you better understand your borrowing capacity when buying a home. It also helps to realise how lenders perceive your creditworthiness.
  • You must factor in the impact of inflation and rising interest rates when calculating how much you can realistically afford for a downpayment, monthly mortgage payments, and associated homeownership costs.
  • Additionally, any prospective homebuyer must maintain an emergency fund to cover unexpected expenses, such as repairs or medical bills, without compromising your ability to make mortgage payments.

The role of long-term financial planning in achieving homeownership goals:

  • As part of your long-term financial plan, establish specific, measurable and achievable homeownership goals. Also, determine your desired timeline for home purchase.
  • Automate regular savings for your downpayment for your home purchase and other homeownership expenses into your long-term financial planning. At the same time, consider reducing high-interest debt that can free up more resources for saving and mortgage payments.
  • To stay on track toward homeownership, you must continuously monitor economic trends, interest rate forecasts, and changes in government policies related to the property industry.

Government schemes and grants to support first-time homebuyers in Singapore

The Singaporean government has a history of implementing measures to support first-time homebuyers. Familiarising yourself with various initiatives can significantly alleviate some of the financial pressures associated with purchasing your first home.

HDB Interest Rate Policy: During inflation and rising interest rates, HDB’s steadfast policy has offered homeowners crucial financial stability. While commercial banks raised mortgage rates, HDB maintained its concessionary rate at a steady 2.6% throughout the year, providing homeowners with a reliable and secure financial foundation.

Lower TDSR Limit: Reducing the Total Debt Servicing Ratio (TDSR) limit to 55% encourages financial prudence among borrowers. It helps mortgage borrowers avoid over-leveraging themselves and taking on more debt than they can comfortably manage.

In the context of home loans, the TDSR limit can contribute to a more stable property market by preventing risky buying and excessive borrowing for property investments.

Lower LTV Limit: Imposing a lower Loan-to-Value (LTV) limit of 75% affects the amount of the property price that can be financed through a loan while helping to mitigate the risk of over-leveraging among homebuyers.

Although it may initially seem challenging, the lower LTV limit can lead to enhanced loan affordability. Requiring borrowers to put down a larger downpayment can lead to lower monthly mortgage payments and potentially lower overall borrowing costs.

CPF Housing Grants: The government offers various Central Provident Fund (CPF) Housing Grants to eligible first-time homebuyers. These grants can play a crucial role in helping first-time homebuyers meet the down payment requirements imposed by the lower LTV limit.

These grants provide financial assistance, reducing the upfront financial burden on buyers and making homeownership more accessible.

ABSD Relief: The government may provide Additional Buyer’s Stamp Duty (ABSD) relief to first-time buyers under certain conditions. This relief can help reduce the upfront cost of purchasing a property.

Resale Levy: In the case of HDB flats, some first-time buyers may be eligible for a resale levy remission, which reduces the amount they need to pay when upgrading to a larger flat.

Why should first-time homebuyers seek the services of home loan consultants?

Navigating high inflation and rising interest rates requires expert guidance. Therefore, first-time homebuyers can benefit significantly from engaging a mortgage broker or consultant.

These professionals bring specialised expertise, particularly crucial in times of high inflation and rising interest rates. They possess an in-depth understanding of the real estate market, lending practices, and the intricacies of mortgage products.

These experts help evaluate available mortgage options while providing tailored advice after assessing your financial situation. Engaging with a mortgage consultant can offer several advantages:

  • Navigate Complex Financial Terrain: Mortgage consultants and financial advisors guide first-time homebuyers through the complex landscape of fluctuating interest rates and inflation, explaining how these factors impact borrowing capacity, monthly payments, and overall affordability.
  • Tailor-made Solutions: They assess an individual’s unique financial situation and goals to offer tailored advice. It includes recommending mortgage products that align with the buyer’s long-term plans and risk tolerance.
  • Access Exclusive Options: Mortgage consultants often have access to a wide range of mortgage products and lenders. In a market affected by rising rates, they can identify favourable terms and negotiate on behalf of their clients.
  • Plan for the Future: These experts can help buyers plan for future financial scenarios, accounting for potential increases in interest rates and inflation, ensuring they won’t be caught off guard.

The personalised guidance of a mortgage consultant ensures first-time homebuyers make informed decisions, even in challenging economic conditions, ultimately increasing their chances of successful homeownership.

Final Thoughts

Inflation and the persistent upward trajectory of mortgage interest rates are casting a shadow over the homeownership dreams of Singaporeans. It is an urgent call to action for individuals to kickstart financial planning and leverage tailored solutions to bolster their well-being.

However, it is crucial to understand the long-term (spanning 25 to 30 years) perspective on mortgages. Paradoxically, securing property under current interest rate conditions may provide a buffer against rising property prices typically associated with lower interest rates.

While high inflation and rising interest rates present formidable challenges for first-time homebuyers in Singapore, our team of mortgage consultants helps you select the most suitable loan product based on your financial goals and prevailing market conditions.

Get the best home loan in Singapore across all major banks and compare mortgage rates with the highest rewards.

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