COVID-19 has had widespread implications on the global economy and presented a period of upheaval in the mortgage market. The massive decline in the global economy severely affected the global mortgage industry and Singapore was no different. But as economies start to open up and recover, interest rates gradually will rise. As we head into 2022, the common question looming is “when will our mortgage rates start to go up in 2022?’.
Looking back, in response to the COVID-19 pandemic, the US Federal Reserve (Fed) slashed the target range for its benchmark federal funds rate to 0–0.25%. Since the Singapore Interbank Offered Rate (SIBOR) is highly correlated to this rate, Singapore experienced a steep drop in both its floating and fixed mortgage rates for the majority of 2021.
TThis article covers everything that you need to know before committing to a mortgage loan post-COVID-19 and if mortgage interest rates will go up in 2022.
At the onset of COVID 19, the Fed steeply decreased its target for the federal funds rate (the reference for most interest rates, including SOR and SIBOR) at a range of 0% to 0.25%.
The goal behind keeping the benchmark rate at rock-bottom levels is to stimulate economic activity. As of now (Dec 2021), the 1-month and 3-month SIBOR rates stand at 0.30% and 0.43%, respectively. The interest rates were first lowered to almost-zero levels on March 15, 2020.
The current lower interest-rate environment has made mortgage loans in Singapore an even more stunning bargain for homebuyers and investors. The low mortgage interest rates could mean lower monthly mortgages, higher returns (assuming rents hold firm), and the ability to service a larger loan amount for borrowers. But the low interest-rate environments have a different side too.
The reduction in interest rates due to the COVID-19 pandemic has spurred a wave of refinancing among homeowners. While this is a smart thing to do in a low interest-rate environment, the spike in refinance opportunities has caused an overflow of client requests and applications at banks.
Global lockdowns and shelter-in-place orders are further adding to a dramatic increase in unemployment. While on one side, the unemployment claims have speared to notable proportions, banks and financial institutions are tackling a massive rise in missed payments on the other.
COVID-19 relief measures undertaken by the government and regulatory bodies to aid borrowers has steered volatility into the mortgage-backed securities market, and is putting a great deal of pressure on hedge positions of lender banks.
Down to the pandemic already, banks and financial institutions are expected to devote an extensive amount of time to default management. This has driven risk-averse financial lenders to tighten their criteria with respect to approvals for mortgage applications in Singapore.
One obvious question that crops up in the mind of property owners in a low interest-rate environment is how long will interest rates stay low in Singapore. Let us dig a little deeper to understand the situation.
The year 2019 started out hot for the mortgage market where interest rates were actually on the rise. However, the pandemic hit the economy, pushing interest rates to rock-bottom levels by March-April 2019.
Now, the U.S. Federal Reserve’s announcement to keep interest rates at near-zero levels till at least 2022 will have a knock-on effect on other small countries, including Singapore, due to its trade-centric economy. This means that as long as the COVID-19 situation remains an ongoing health crisis, interest rates are expected to stay low to near-zero levels in Singapore.
This is good news for homeowners in Singapore currently repaying their housing loans. Considering the current economic trajectory, due to COVID-19, it would not be unreasonable to assume that banks will continue to offer historically low home loan interest rates till the end of 2021.
However, as the economy recovers from the pandemic, mortgage interest rates are expected to follow suit on an uptrend.
Please note that although SIBOR will be replaced by Singapore Overnight Rate Average (SORA) by the end of 2024 as the reference rate for home loans in Singapore, both these benchmark rates generally display similar trajectories.
Before the pandemic’s blow, the Fed had gradually begun to increase interest rates starting from 2014, after keeping them low due to the global financial crisis of 2008.
At that time, there were stories in the newspapers reporting how new Singaporean homeowners with floating rate home loans ran into financial difficulties due to a rise in monthly repayments.
Fortunately, in 2019, the Fed halted this policy. However, there was no time to rejoice as the pandemic occurred. Had the policy reversal and the subsequent pandemic not hit us, many homeowners could have faced the heat of rising SIBOR rates in Singapore.
Talking about the current scenario, one thing that has improved the COVID-19 situation is an effective vaccination drive. It has hastened global economic recovery, which has led to a quicker recovery in inflation and employment levels, which marks a higher likelihood of an increase in interest rates in 2022 and beyond.
However, as Singapore’s economy opens up further, there will be a greater risk of virus infection considering different variants of this novel coronavirus.
With the rising COVID-19 clusters as well the emergence of the Omicron variant, we might be seeing a reversal to the implementation of community safe management measures to reduce community infections.
Though relatively slower, the economic growth would be on a positive run due to the inadvertent push towards a semblance of normalcy, resulting in increased mortgage interest rates in 2022.
Globally, the Fed has also indicated 7 interest rate hikes over the next three years, with the earliest happening in Q1 of 2022. If it reaches fruition, the interest rate levels will peak by 2024.
What is even more important to understand for homeowners is that buying a house with a mortgage loan is a long-term commitment that lasts two to three decades, not just two or three years.
Therefore, borrowers should pay attention to the longer-term interest rate trends to make smarter decisions. If interest rates go upwards in the near future, which they certainly will, you do not want to be stuck in a situation where refinancing or managing your mortgage monthly repayments pose a problem for you.
In Singapore, monthly housing loan repayments are calculated via an amortisation principle. Understanding and learning how mortgage rates are calculated as well as historical trends are key to ensuring you get the best mortgage loan.
To showcase an example, let us say you borrow $500,000 at 4% for 30 years, which needs to be repaid through monthly instalments.
To calculate the monthly instalment, change the percentage rate to decimal format, and then follow the formula:
A = payment amount per period (monthly repayment)
P = initial principal (i.e. loan amount), say $500,000
r = interest rate per period, which for e.g. is 4% per year / 12 months = 0.333% per period (0.00333)
n = total number of payments or periods, which comes out to be 30 years * 12 months (=360 periods)
The monthly repayment is $2,387. Now, if interest rates rise, home loans can become more expensive for mortgage borrowers. Let us summarise why it is crucial to think about what steeper costs mean for you through this table below.
|Mortgage Amount||Interest Rate||Mortgage Tenor||Monthly Payment towards interest|
It is important to understand that small changes in interest rates can make a significant difference in how much you will pay and save.
Here, you can clearly see that just a 1% rise or fall in interest rates would mean either a savings or an additional expense of $400 a month!
This means $48,000 over a 10-year period – money which goes to the banks as their profit and your loss!
One of the first things a property buyer must decide when selecting a home loan rate is choosing between a fixed-rate loan or floating-rate package. It is hard to articulate that a fixed-rate loan is always better than a floating rate, or vice versa.
It is crucial to understand how interest rates will behave in the next two to five years (lock-in period) and how they will affect the overall loan cost. Looking at a longer time horizon may be less relevant here as you can choose to refinance your home loan after the lock-in period.
A fixed-rate home loan package will guarantee a static interest rate to the borrower for a specified lock-in period, which is typically between two to five years. During this fixed period, your monthly repayments would remain the same with pre-determined interest rates irrespective of changes in market interest rates.
However, after this period, your fixed interest rate home loan will be automatically pegged to SIBOR, SORA or Fixed Deposit Rate (FDR) as offered by the bank home loan package. The new interest rates may be equal or even higher than a bank’s floating-rate home loan after the lock-in period, depending on the bank spread. The revised interest rates may be tied down to higher ones if the interest rates fall during the lock-in period.
It is advisable to take out a fixed-rate home loan over a floating rate like a SORA home loan when overall interest rates are threatening to rise. This way, your loan package will ensure a fixed interest rate for a specified time, providing you with an opportunity to save future costs when market interest rates rise upwards. However, this also might leave you at a disadvantage in low interest-rate environments.
A floating rate home loan is subjected to periodic adjustment, which varies depending on the chosen floating home loan type (1-month or 3-month SIBOR or SORA). Your monthly repayments may vary based on the movements in floating interest rate benchmarks (SIBOR, SORA or FDR).
SIBOR and SORA rates change frequently (once in a month or once every three months), which might make it hard to budget your monthly finances. In comparison, FDR rates are solely controlled by the lender bank, which may change interest rates anytime with 30-day advance notice.
Generally, the lock-in period for floating home loans varies between one to three years. Such types of housing loans may allow a partial or early repayment during the lock-in period without penalty.
When the interest rates are stable or falling, it is generally advisable to choose a floating rate home loan. As floating interest rates fluctuate over time, banks are willing to offer a lower rate than fixed rates for the opportunity to charge you higher rates later.
A floating rate home loan may also work well for those looking to make regular partial prepayments to lower their principal amount, without incurring hefty penalties.
Let us say you have the choice of repaying at a fixed rate of 1.5% over the next three years or repaying at a 1% floating rate for now. Suppose shortly after you took out the loan, central banks across the world increase their mortgage loan interest rates.
Now this means, from the second year, you might have to pay 2% to 2.5% in floating rates while the fixed interest rate remains at 1.5%.
A change of 1% in interest rate may not look like a big difference, but when you take out a loan amount of $500,000, even a small difference of 1% can result in you paying an additional $5,000 in interest payments every year.
With the high rise in unemployment during the COVID-19 situation, the stability of your job must be considered before pulling the trigger on a long-term commitment like a home purchase.
While a lender will verify your employment and qualified income, borrowers need to do their own evaluation as well. Consider the worst-case scenario and run through a what-if case scenario.
Consider the stability of your job and the likelihood of a layoff. If so, what options do you have if such a thing happens? Do you have enough savings for a rainy day?
If you are someone who frequently wonders what your career will look like in the next five years or so, you might want to stay protected against any drastic hikes in floating rates.
The stability of fixed-rate packages may work better for you. In fact, borrowers with a steady stream of documented income are viewed favourably by the lender bank and may be offered lower interest rates.
Ultimately, it boils down to realising how much of a monthly mortgage repayment you can afford now and in the long term, such that it will not affect your lifestyle.
If you are someone who understands the macro-economic environment and saving every dollar makes a difference to you, you may want to choose floating rates and save on your total interest paid.
Like any other investment or financial decision, the key is to bear in mind the long-term view while staying attuned to the latest trends and developments. Prudently set aside emergency funds so that you have enough cash or liquid assets for your monthly instalments over the next two years in case you face any unforeseen circumstances.
Before signing on the dotted line, you should always be mindful of the mortgage loan conditions and restrictions attached to the home loan contract. These specifics, when overlooked, can later spell more trouble for you. Take note of the loan lock-in period, loan-to-value ratio (the maximum limit you can borrow), loan tenure, and interest rates before shortlisting a mortgage loan.
Of course, also always compare the different mortgage interest rate options to determine which is the best bank for a housing loan for your needs for the longer term as well.
Staying on top of mortgage interest rates during COVID-19 can help you decide whether to lock in a low rate or to float it in hopes of further interest rate reductions. Some people say fixed-rate home loans allow sound money management while others claim that choosing floating home loans offer lower monthly repayments.
There is no better or riskier loan per se. Choosing a mortgage loan in Singapore boils down to the borrower’s current financial situation and ability to tolerate fluctuating interest rates. Even after picking a housing loan, you can refinance your home loan to get lower interest rates.
As a general rule of thumb, you should choose floating home loans when interest rates are declining and pick fixed home loans when you fear them moving up quickly. At present, floating home loan interest rate packages hover between 0.78% and 1.00% and it is unlikely it will fall any lower.
The next significant trajectory of the interest rate will probably be upwards, unless we are hit by a new strain of deadly coronavirus or a new black swan event. You may want to take out a fixed loan package and secure the low rates for the next few years if you do not want to deal with fluctuating interest rates every month.
COVID-19 might have driven mortgage interest rates down for maybe the next two to three years, but buying a house is a long-term investment that would stretch over many years (20 to 30 years). Therefore, such a huge financial commitment requires careful planning and consideration as minute adjustments in interest rates could make a substantial difference to the monthly repayment amount. And you do not want to be making short-sighted decisions that will cause you financial stress in the long term.
The truth is, approaching financial decisions like a math problem will not always solve the problem.
Life would be much easier if important financial decisions like choosing the right home loan or predicting future interest rates could be done through financial calculators and/or financial planning programmes available on almost every financial website for free.
It requires you to take a long-sighted approach and find a flexible solution that works for your unique circumstances – which are what our mortgage advisors at DollarBack Mortgage do with a passion.
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