FAQ: What home owners in Singapore need to know after another Fed rate hike

SINGAPORE: The US Federal Reserve has delivered its fourth interest rate hike of the year, continuing an aggressive campaign to fight surging inflation in the world’s biggest economy.

The Fed raised its policy rate by another 75 basis points at the end of a two-day meeting on Wednesday (Jul 27), mirroring a similarly hefty increase in June.

Coupled with two smaller rate adjustments in March and May, the US central bank has raised its policy rate from near zero to a level between 2.25 and 2.50 per cent this year. This marked the Fed’s fastest tightening in monetary policy since the 1980s.

And it does not seem like US officials are ready to release the pedal yet, with inflation still raging at decade-highs.

“The Fed has to show conviction that it is serious about bringing inflation back down to or close enough to 2 per cent, (which) is a long way to go from the current 9.1 per cent,” said MortgageWise.sg’s executive director Darren Goh.

What might change, however, is the Fed opting for a slower pace or “bite-sized” hikes of 25 basis points at each subsequent policy meeting or intermittently, he added.

UOB analysts echoed that market expectations remain firm for the Fed to continue hiking rates and expect three more interest rate increases – ranging from 25 to 50 basis points – over the rest of 2022. The Fed could also extend the rate-hike cycle to early next year, they added in a report.

Further rate hikes are no doubt worrying for home owners in Singapore who have seen revisions in mortgage rates offered by private banks. What can home owners expect down the road? We ask the experts.

Q: How much higher will mortgage rates go?

It was only at the start of this year when fixed rate home loans were going at about 1.5 per cent but they have since more or less doubled.

Last month, Singapore's three major banks – DBS, OCBC and UOB – raised their mortgage rates after the Fed’s 75-basis-point hike.

DBS raised the rates on all its fixed rate packages to 2.75 per cent per annum, while axing a five-year fixed rate plan that offered HDB flat buyers an exclusive rate of 2.05 per cent.

UOB followed by increasing its two-year and three-year fixed rate packages to 2.98 and 3.08 per cent per annum respectively.

OCBC then upped its two-year fixed rate loan to 2.98 per cent per annum.

Floating rate home loans, which are pegged to benchmark rates such as the Singapore Overnight Rate Average (SORA), have not been spared from increases as local interest rates trek north and banks revise their additional lending margins.

The three-month compounded SORA, for one, has risen from 0.2 per cent in early February to 1.2 per cent as of Jul 27. Add in the varying spreads charged by banks, a typical floating rate home loan pegged to the three-month rate now comes up to about 2 per cent, said Singcapital’s chief executive Alfred Chia.

The Fed’s latest move is expected to push up borrowing rates further.

“Private banks will adjust their fixed mortgage rates quite rapidly to reflect the higher funding costs in the interbank. We are expecting fixed rates to go above 3 per cent soon following the latest 75-basis-point increase,” Mr Goh told CNA.

UOB analysts said short-term interest rates in Singapore are set to head higher into the first half of 2023, given its “relatively hawkish” outlook for US policy rates. For example, the three-month compounded SORA could hit 2.6 per cent by end-2022.

Meanwhile, Mr Chia has revised his estimates for mortgage rates to “around 4 to 5 per cent” by the year-end, up from an earlier forecast of 3 per cent.

Q: Are HDB loans looking more attractive now? 

With banks’ mortgage rates on an upward trajectory, HDB housing loans being offered at 2.6 per cent per annum are emerging as a more affordable option.

The concessionary interest rate for HDB loans is pegged at 0.1 per cent above the prevailing Central Provident Fund (CPF) Ordinary Account (OA) interest rate of 2.5 per cent. This is reviewed quarterly but has remained unchanged since 1999.

Generally, this stability in rates means that home owners on HDB loans can be spared from interest rate fluctuations and the trouble of having to keep shopping around for refinancing or repricing options.

Other advantages include no lock-in periods hence no penalties for paying off loans early, and the ability to borrow up to 85 per cent of the flat’s value, said Huttons Asia’s senior director of research Lee Sze Teck. For banks, the loan-to-value ratio is capped at 75 per cent.

On the other hand, stable rates mean that HDB loan takers will not get to enjoy any savings when interest rates go down.

“Interest rates do change over time,” Mr Lee said. “It is more important to ensure that the HDB flat purchased is affordable and the mortgage ratio is kept at a comfortable level, say 20 per cent.”

Do note that the option of a HDB loan is not available for those who have already taken up bank loans for their homes.

Q: Which is better – fixed or floating rate home loan?

Some experts have recommended home owners opt for fixed rate mortgage packages to hedge against future rate increases.

For example, an individual taking out a S$400,000 loan with a 25-year tenure at a fixed interest rate of 3 per cent would have a monthly instalment of S$1,897. If the same individual takes up a floating rate package priced at 1.8 per cent, he or she would pay S$1,657 instead a month, said Mr Lee.

But this difference may narrow in the months ahead given expectations of rising interest rates, he added, noting that some may prefer a fixed rate home loan for peace of mind.

On the other hand, Mr Goh pointed out how Fed funds rate has been going up in “almost a straight line”, which suggests that the interest rate cycle “will hit the peak and come down much sooner than past cycles”.

“(The Fed) hopes not to trigger a recession but will risk one if that’s necessary to achieve its price stability mandate at all costs. In other words, Fed will pause rate hikes at some point in 2023 and typically, rates tend to reverse down after that,” he said.

“So the key here is not to be locked into a home loan package for too long. The way we see it, the risk is high now for those who are contracted all the way till end of 2024, as they might get stuck with a much higher rate than they like when the frenzy ends.”

Q: Pay my loans earlier? What other options are there?

Some experts that CNA spoke to previously have also suggested home owners consider making partial or full repayments, increase the use of CPF for monthly loan instalments, or lengthen one’s loan tenure to lower the monthly instalment.

But each option has its pros and cons.

For earlier loan redemptions, Mr Goh said this depends on one’s age and risk appetite.

“It's not a good idea to repay mortgages too early, as the flip side is you reduce your opportunity to grow your investments. However, the risk-reward for investing is a whole different topic altogether and some people (may prefer to repay their) debt,” he explained.

When it comes to deciding whether to use cash or CPF for repayments, Mr Chia recommends using excess cash as funds in CPF can earn an interest rate of 2.5 per cent.

Also, home owners will need to return the amount they have taken from their OA, plus accrued interest, when they sell their house.

Mr Goh suggests home owners decide based on the prevailing mortgage rates. 

“If it goes above the CPF OA rate of 2.5 per cent, you should use CPF, rather than cash,” he said. “Understand that you are still ‘borrowing’ when you do that (so) naturally you’ll pick the one who charges a lower rate.”

Ultimately, prudence is the way to go.

“Interest rate hikes will have winners and losers. Home owners need to brace for rising rates and ensure they practise prudent financial management,” said Mr Chia.