How home owners can cope with rising monthly mortgage payments

May 16, 2022

SINGAPORE - To rein in inflation, interest rates have been revised upwards, raising borrowing costs for all types of loans, from housing and car to education.

Faced with higher bills for food, transport and utilities too, how can consumers and households ensure that their finances stay above water?

For a start, they can look at one of their biggest financial commitments, their home.

While many know that one should buy a property that is within their means, what is the benchmark to aim for?

Ms Lee Meng, executive financial services consultant at financial services firm Gen Financial Advisory, said a property should cost at most 10 years of a person's income.

She also advises households to use only one income (the more stable one) to determine affordability.

She said this will provide a buffer in the event a couple's income is affected because one party has to stop work.

A residential property is also a long-term financial commitment and the loan tenure can stretch to 35 years.

During this timeframe, ups and downs in financial markets or changes in the market environment can hit home owners.

Some households have already relooked their home loan packages in anticipation of rising interest rates, with some banks already notifying customers of higher rates.

The publicly available rates on the banks' websites have all indicated a jump of between 0.1 per cent and 0.65 per cent a year.

Mr Dallas Goh, 31, a lab technician, repriced his loan with UOB last month, tapping a two-year fixed rate loan at 1.45 per cent a year.

He also took the opportunity to repay 10 per cent of his principal amount borrowed.

A lower loan quantum means reduced monthly mortgage payouts.

In total, Mr Goh said, he would save close to $300 a month.

Paying down a loan is a very personal decision, and dependent on individual households' circumstances.

In Mr Goh's case, he decided to sell some of his shares and used the profits to retire a portion of his home loan.

For other home owners who are thinking of reducing their loan principal, Mr Christopher Tan, chief executive of wealth management and advisory firm Providend, said the decision may hinge on whether they can use the spare cash to earn returns that are higher than their mortgage rate.

If they are able to, he added that they should not pay down their loan amount.

But home owners will also need to ask themselves if they prefer to get more peace of mind from owing a lower loan quantum.

"Everything must be anchored on this thing called life decision. What is it that you do that will give you that peace of mind?" Mr Tan added.

There will, however, be some households whose financial position may not allow them to reduce their loan principal.

These households, which are also likely to feel the biggest financial strain from rising interest rates, may have to extend their loan tenure to lower their monthly repayments.

Still, Mr Tan said, home owners should not extend their loan terms beyond their planned retirement age, adding that extension also incurs a bigger outlay on interest.

One can also consider using more money from the Central Provident Fund (CPF) Ordinary Account (OA).

Take the example of a home owner who is currently paying half his monthly mortgage with cash and half with OA savings.

When monthly mortgage repayments go up, Gen Financial Advisory's Ms Lee said, the owner can increase the contribution from his OA so that his cash commitment remains the same.

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

This interest amount is equal to what they would have earned, if they had kept the money in their CPF accounts.

The current interest rate for the OA is 2.5 per cent a year.

The second thing to note is that using CPF savings will eat into one's funds for retirement.

Providend's Mr Tan said he has seen a lot of CPF members with very low OA amounts because they are using almost all their OA savings to service their housing loans.

"A lot of people tell me that they don't have a lot in their CPF OA because they have used it to pay for the house," he added.

Business cycles typically go through four major phases: expansion, peak, contraction and trough, after which the cycle starts again.

The current environment of inflation and rising interest rates indicates that the economy is at an expansion phase and close to reaching its peak.

After the economy reaches its peak, it will enter the contraction/recession phase before hitting a trough.

The economy will then pick up from the trough.

What this means is that this phenomenon of rising interest rates and inflation is temporary, though uncertainties such as the Ukraine crisis and the Covid-19 pandemic may throw up surprises.

Notwithstanding where the headwinds blow from, households and consumers will just have to hunker down and ride out the tough times.

"You just have to accept that over the next one or two years, you will save less and it is fine. This situation will pass," said Mr Tan.

https://www.straitstimes.com/busines...tgage-payments