Rising interest rates and their impact on mortgages in an open economy like Singapore

When domestic interest rates are largely influenced by global market movements, and especially by US rates, they can thus be expected to rise

Mon, Dec 20, 2021
UPDATED Thu, Dec 30, 2021

WITH interest rates coming off record lows, mortgage brokers are advising prospective homeowners and those looking to refinance to lock down fixed rates - where they are still hovering around a fairly low range - before the gap between fixed- and floating-rate financing widens.

The US Federal Reserve said on Wednesday it would double the pace at which it is scaling back bond purchases in its fight against inflation, with a majority of its members forecasting 3 interest rate hikes by the end of next year.

For an open economy like Singapore, domestic interest rates are largely influenced by global market movements, and especially by US rates. They can thus be expected to rise, going forward.

Already, banks here have been pricing in these expectations. Darren Goh, executive director at MortgageWise.sg, said fixed rates might have risen by about 30 basis points in recent weeks.

"Take for instance a S$1 million mortgage. You could possibly have gotten a home loan at 1 .10 per cent in November, but this is no longer attainable. Fixed rates have since risen to around 1.50 to 1.60 per cent," Goh said.

Floating rate packages pegged to Singapore Overnight Rate Average, or Sora, have remained more subdued as they tend to correlate more with short-term rates, which have not moved.

"We expect that to move up more significantly when the rate hikes actually happen, likely in the second half of 2022," he said.

Mortgage rate types

In Singapore, the Housing and Development Board (HDB) offers loans for those buying public housing flats. Interest rates for HDB loans stand at 2.6 per cent per annum - pegged at 0.1 per cent above the prevailing rate offered by Central Provident Fund ordinary accounts.

Those buying private properties will have to take a bank loan - which is also an option for HDB buyers - and have to choose between fixed and floating-rate packages.

Fixed-rate packages are subject to the same interest rate throughout a "locked-in period", which spans 1-5 years. After the period is over, the package will be pegged to a reference rate, which could be the bank's fixed deposit rate or Singapore Interbank Offered Rate (Sibor), depending on the package chosen.

Fixed rates tend to be higher than floating rates, but borrowers "buy" peace of mind as their mortgages are relatively impervious to interest rate hikes.

Interest rates on floating-rate packages can be adjusted periodically, based on movements in the Sibor or fixed deposit rates. These packages tend to charge lower interest at the outset, but borrowers must be able to stomach the risk of considerable rate hikes. Some floating rate packages do not have "lock-in periods", which gives borrowers flexibility to refinance with other banks without incurring penalty fees.

Lock in fixed rates

Even when the Fed's rate hikes take effect, it will take a while for Singapore to realise the full impact of these actions. Now is therefore still a "fairly safe" time to lock down fixed rates near historically low benchmarks.

"You cannot go quite wrong with that coming from such a low base, especially in the current more hawkish environment," Goh said.

Wayne Quek, senior mortgage adviser at Home Loan Whiz, recommends buyers with a low-medium risk profile to stick with shorter-term fixed rate packages and review their plans after, say, 2 years.

Clive Chng, associate director at RedBrick Mortgage Advisory, is also of the view that existing homeowners looking to refinance their mortgages should opt for fixed rates. However, there are some exceptions, he noted.

A floating-rate package will make sense for…

Floating rates typically make sense when interest rates are set to fall. Yet in a rising rate environment, it can still be relevant for some groups of people.

Those taking up new loans and are looking to sell their properties within 1-2 years can consider floating-rate loans that include waivers of penalty fees due to sale. Fixed-rate packages typically do not have such features. This would typically apply more to property investors who want to retain the flexibility of selling when a good offer comes around.

Those who want the flexibility to make prepayments should also opt for floating rates. Rising interest rates may motivate borrowers to repay their mortgages more quickly to avoid higher future interest payments. Those who are expecting additional liquidity in the coming years, such as via good bonus payouts, could consider floating rates.

Interest-offset mortgage accounts

However, RedBrick Mortgage Advisory's Chng suggests looking at interest-offset mortgage accounts as an alternative to paying off mortgages before the end of their tenure. Deposits in such accounts earn a high interest rate that matches the housing loan.

The interest earned will be first used to offset the interest of the mortgage, while the balance remaining in the offset account will be used to pay the principal. In the long run, the loan can then be redeemed within a shorter repayment period.

"One advantage of these accounts is the ability to utilise your deposits as cash, the way you would with a current account, whereas if you make partial prepayments, the money will be stuck as equity in your property," Chng said.

The catch, however, is that the interest granted would apply to just a fraction of one's deposit in the offset account, depending on the bank.

Currently, Standard Chartered, Citibank and HSBC are the 3 banks that offer interest-offset mortgage accounts.