Commentary: Why that loan to buy that new house and car is cheaper now
With the Federal Reserve in the US signalling interest rates will stay close to zero for the next three years, borrowers in Singapore can expect lower SIBOR rates for longer, says OCBC’s Tan Siew Lee.
SINGAPORE: The next interest rate increase in the US is likely years away, according to the Federal Reserve (Fed).
At their recent policy meeting, the Fed signalled that interest rates will likely stay close to zero for at least the next three years, through 2023.
The policy event at the Fed holds important implications for Singaporeans.
For one, the Singapore Interbank Overnight Offered Rate (SIBOR) – the reference rate for many lending and savings products in Singapore – is highly correlated with the Fed funds rate.
The 3-month SIBOR hovered below 0.5 per cent for close to six years when the Fed kept interest rates at rock-bottom levels between 2009 and 2015, after the global financial crisis in 2008.
With the Fed expected to do the same for the next few years, SIBOR will likely stay lower for longer as well. As it stands, the 3-month SIBOR has declined to less than 0.5 per cent from 1.5 per cent just a year ago. This will doubtlessly impact most Singaporean households.
NOT MUCH TO GAIN FROM DEPOSITS
As many would have observed, a key consequence of the Fed’s move to zero earlier this year is the sharp decline in interest rates paid on yield-accretive deposit accounts and fixed deposits in Singapore. Indeed, it is getting harder to find deposit products that pay very attractive interest rates.
Even in good times, leaving too much cash idle in deposit accounts is unwise. Excess cash is best invested in the markets to earn better returns. With interest rates close to zero, this is even more pertinent today, especially given the fact that the return on cash is dismal.
Ideally, Singaporeans should hold around six to 12 months of their monthly expenditure as emergency cash. Beyond that, they should start investing their money to beat domestic inflation and preserve or increase the real value of their funds.
Recent market turbulence, however, may turn some people off from investing. Yet, waiting for blue skies might mean losing out on attractive investment opportunities that might emerge from such volatility.
A dollar-cost-averaging strategy might be a useful way to take advantage of market volatility while still managing risk. You are essentially investing gradually over time instead of trying to time the markets.
Monthly investment plans are one practical way to express this idea. Instead of investing a lump sum at a particular point in time, you invest fixed amounts each month over a fixed period of time.
It is a wallet friendly approach and allows you to engage opportunities in financial markets in a steady and gradual fashion.
BE CAREFUL IN THE HUNT FOR YIELD
Those with higher risk appetites, may wish to join the frenzied hunt for yield amid the low interest rate environment. Low interest rates may also prompt many to reach for riskier assets with higher returns.
Amid the potential flurry of risk-taking behaviour, Singaporeans should remain prudent and guard against investing in products with flashy returns without fully assessing the risks.
They should adopt a long-term view on their investments and focus on quality assets that can offer stable returns despite the difficult operating environment.
They should also stay diversified and not concentrate their bets on a single security or asset class. Diversification is important to ride out the volatile environment ahead.
Importantly, Singaporeans should be realistic about their expectations for investment returns.
In an environment where the risk-free 10-year US Treasury note yields a paltry 70 basis points, expecting financial assets to deliver more than 5 per cent yields at very low risk is clearly unreasonable and unrealistic.
On the liabilities side of the balance sheet, with interest rates expected to stay depressed, it might be an opportune time for Singaporean households to review their debt obligations.
If they are still servicing a mortgage, they should check if they are eligible to reprice or refinance their loans at more attractive interest rates to reduce interest payments on debt.
In addition, low interest rates typically support the property market as it becomes cheaper to access funding. In the US, home sales sharply rose above pre-COVID-19 levels largely due to more competitive mortgage rates.
Unsurprisingly, Singapore has exhibited the same trend, with home purchases rising sharply as the cost of borrowing declined. According to the Urban Redevelopment Authority, private home sales in Singapore hit an 11-month high in August.
Low interest rates might tempt Singaporeans to take on additional loans to purchase an investment property.
But just because they can does not mean they should, as there are many variables to consider. For one, it might not be advisable to pile on more debt while the economy is in a recession and the outlook for the labour market remains uncertain.
The prospect of future incomes may be less certain than usual in these circumstances.
Also, financing an investment property is a long-term commitment that could stretch decades. Lower interest rates for longer does not mean lower rates forever. There is always a risk that interest rates may edge higher should the global economy recover briskly.
Singaporeans should consider these factors seriously before taking on a new loan for a shiny new object.
Headline interest rates for car loans may come off as well, in line with market interest rates. While it might be tempting to take advantage of such attractive interest rates to finance the purchase of a car.
Singaporeans should carefully weigh the need of buying the new car versus the debt that they are taking on.
SYMPTOM OF THE TIMES
Ultimately, low interest rates are a symptom of the times. It is necessary because the economy is still working through a deep recession and economic conditions are still weak. Against this backdrop, good money and debt management is paramount to ride out this difficult period.
Low interest rates may inspire more risk-taking for investments or increase the allure of buying an investment property or a new car. In making these decisions, risk management must be foremost in one’s mind.
Can you afford to lose the money you put into an investment should something untoward happen? Can you afford to take on more liabilities given your current financial situation? Do you have enough cash buffer in the unfortunate case of an emergency?
These are important questions to ask as we navigate years of zero interest rates.
Tan Siew Lee is Head of Wealth Management Singapore at OCBC Bank.