CNA Explains: Where are mortgage rates in Singapore headed and what should home owners do?
Analysts give their forecasts on how high home loan rates could go and why people should brace themselves for a "big interest rate shock".
SINGAPORE: Home owners in Singapore will have to brace themselves for higher mortgage repayments as local banks continue to raise interest rates for their home loan offerings.
The lenders are taking their cues from the United States Federal Reserve, which has made three rate hikes this year to combat surging inflation.
With the Fed looking at more interest rate increases this year, we ask the experts where mortgage rates in Singapore are headed and what home owners can do.
THE FED AND RISING INTEREST RATES
With inflation in the US hitting a 40-year-high, the Fed earlier this month announced a 0.75-percentage-point rate rise in its benchmark federal-funds rate to a range between 1.5 and 1.75 per cent.
The move, which came on the heels of a quarter-percentage-point increase in March and a half-percentage-point jump in May, marked the US central bank’s most aggressive rate hike since 1994.
Central banks in other parts of the world have also embarked on policy tightening to quell inflation, including the Monetary Authority of Singapore (MAS) which has adjusted monetary policy three times since last October.
Where Singapore differs is the use of exchange rate, instead of interest rate, as its main policy tool. Coupled with an open capital market, Singapore’s interest rates are hence largely determined by global interest rates, especially that in the US which is the world’s biggest economy.
“Singapore is an interest rate taker due to its small and open economy. Any shifts in interest rates in the US economy will likely have influence on Singapore,” said Mr Leo Li, investment analyst at property platform Ohmyhome.
Benchmark rates in Singapore have gone up.
One of them is the Singapore overnight rate average (SORA), computed from the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank Singdollar cash market.
The three-month compounded SORA, a benchmark that is used by banks to price floating home loans, has doubled from 0.32 per cent in May to about 0.65 per cent earlier this month, according to PropertyGuru Group’s vice-president of financial technology Paul Wee.
But with SORA being a “backward-looking rate”, its movements tend to “experience a lag” versus another benchmark rate – the Singapore interbank offered rate (SIBOR) which is highly correlated with US interest rates.
The three-month SIBOR, another key benchmark used for the pricing of home loans, has gone up from 1.11 per cent to 1.56 per cent over the same period, according to Mr Wee.
“A BIG JUMP” IN HOME LOAN RATES
As these benchmark rates trekked north, home loan rates have risen in tandem.
At DBS, a floating rate package pegged to the three-month compounded SORA now has a higher lending margin of 1 per cent annum, up 0.2 percentage points as part of the bank’s latest adjustment on Tuesday (Jun 28).
Banks typically charge an additional lending margin for their SORA-pegged floating rate loans.
Fixed rate packages have seen bigger adjustments, with some lenders revising their offerings by more than three times so far this year, said Singcapital’s chief executive Alfred Chia.
At one point, some foreign banks here suspended these fixed rate options, usually set for two or three years, due to the rising cost of funds, according to a Business Times article in April.
“I think the banks were also trying to understand the market trend then,” said Mr Chia, adding that some of these packages have been reintroduced with higher rates.
In general, two-year and three-year mortgage loans which carry a fixed rate have seen median rates up from about 1.5 per cent at the start of the year to more than 2.6 per cent, he noted.
DBS on Tuesday raised the rates on all its fixed rate packages to 2.75 per cent per annum. This compared with 2.45 per cent for a two-year fixed loan and 2.6 per cent for a three-year loan prior to the latest revision.
The bank also scrapped its five-year fixed rate plan – an exclusive loan package for HDB flat buyers that was going at 2.05 per cent.
DBS’s move tracks similar changes by the two other local lenders. OCBC raised its two-year fixed rate home loan package to 2.65 per cent per annum, while UOB revised its two-year and three-year fixed rate packages to 2.98 per cent and 3.08 per cent, respectively.
In response to CNA’s queries, OCBC Bank’s head of home loans Maryanne Phua said the bank reviews its mortgage pricing regularly to ensure that its packages remain competitive.
Mr Nelson Neo, head of home financing solutions at DBS Consumer Banking Group, said the bank’s home loan rates and packages are reviewed and adjusted to reflect movements in interest rates following the Fed’s rate hikes.
He added that while it is common for banks to offer higher fixed rates for longer tenures, the bank has set its three-year fixed rate home loan at the same rate as its two-year loan.
"This would benefit customers who are now looking to lock in the fixed interest rate for a longer period, especially with the expectation of further Fed rate hikes," he said.
Mr Neo also pointed to DBS's two-in-one home loan, which allows borrowers to structure up to half of their loan amount in fixed rates and the remainder under a floating rate package with special rates.
The blended rate of such a hybrid home loan package is “typically lower” than a fixed rate package, he said, adding that it helps borrowers to better manage their interest expenses amid a changing interest rate environment.
UOB’s head of group personal financial services Jacquelyn Tan said the bank generally takes “a long-term view” and would consider factors such as the cost of funds, interest rate outlook and the business environment, before making any repricing decisions on its mortgage loan packages.
The bank also continues to offer different home loan options such as fixed-rate loans, floating-rate loans such as those SORA-pegged loans, or a combination of both, she added.
HOW MUCH HIGHER CAN MORTGAGE RATES GO?
Experts expect mortgage rates here to go up further as Fed officials have indicated additional rate hikes to come.
Maybank economists Chua Hak Bin and Lee Ju Ye said that with the Fed’s latest dot plot guiding for another 175-basis-point rate hike to 3.5 per cent by the end of the year, the three-month SIBOR could reach 3 per cent at end-2022 and the three-month SORA may rise to 2.75 per cent.
“Singapore corporates and households should brace for a big interest rate shock, as Singapore short-term interest rates will move sharply higher given the Fed’s aggressive rate hikes,” they wrote in a note.
“Mortgage rates could climb to about 4 per cent by year-end – levels not seen for almost two decades. Rising financing costs will likely eat into consumer budgets and cool the property market.”
Mr Chia reckons that mortgage rates will cross 3 per cent by the end of this year.
“If you want to know the outlook for interest rates, just look at the fixed rate packages which have jumped to more than 2.6 per cent. This means that banks are anticipating that interest rates will hit that (level) or more and they are increasing in advance,” he explained.
“With the Fed expected to hike rates further, SORA will rise in tandem. After adding the banks’ (lending margin), floating rate packages may be 2.6 per cent or higher. And that’s just for this year; we haven’t even started talking about next year if inflation rates do not come down.”
Echoing similar projections, Mr Wee said that based on expectations for the three-month compounded SORA to hit 2.5 per cent and assuming a margin of 0.8 per cent, home owners may potentially be looking at a net rate of 3.3 per cent for floating rate home loans in the next few months.
Fixed rate packages will also likely be “much higher”, with lenders expected to continue monitoring these loan options closely and replacing them with higher rates as and when there are significant movements in the reference rates.
In addition, the likelihood of banks scrapping fixed rate packages also “increases significantly” when interest rates become too volatile, added Mr Wee.
ADVICE FOR HOME OWNERS
Home owners will have to weigh their options.
Mr Wee advised those who are still on SIBOR-linked loans to consider changing to one that is pegged to SORA, as the latter is “backwards-looking … and rate increases will lag the former”.
In addition, SIBOR will be phased out by end-2024 – a move that the MAS has said is in line with global interest rate benchmark reform efforts.
“Banks may also possibly withdraw SIBOR packages earlier, compelling clients to move to other available packages and exacerbating the risk,” Mr Wee added.
Mr Chia also urged home owners to start reviewing their mortgages and move into fixed rate packages if possible to hedge against rate increases.
“The fixed rate is now much higher than SORA-pegged loans but I would still urge people not to take a short-term view because we know interest rates will eventually go up,” he said, adding that fixed rate packages will fit those who prefer some stability when it comes to managing their finances.
Other suggestions to cope with interest rate volatility include the possibility of making partial or full repayments via cash or the Central Provident Fund (CPF) for those looking to manage their cashflow. They can also consider increasing the use of CPF for their monthly loan repayments, said Mr Wee.
OCBC’s Ms Phua advised consumers to review their affordability before committing to home purchases, while DBS’ Mr Neo highlighted the need for borrowers to set aside sufficient funds as a buffer against further rate hikes or unforeseen circumstances.
“Ideally, one should set aside some savings in cash or liquid assets that can be used to pay for their monthly instalments for the next two years. This would allow sufficient time to restructure the loan, or even sell the property should they run into any financial issues,” Mr Neo said.
For new home buyers seeking more stability, they may consider HDB housing loans which are currently offered at 2.6 per cent per annum, lower than some bank loan packages, experts also said.
The concessionary interest rate for HDB housing loans is pegged at 0.1 per cent above the prevailing CPF Ordinary Account interest rate of 2.5 per cent, and is reviewed quarterly in January, April, July and October each year.
At the end of the day, home owners must exercise prudence and not end up being overstretched financially, Mr Chia said.
“You are buying your dream home and you definitely don’t want to turn that into a castle of nightmare.”