Higher mortgages loom with impending Fed rate hike

SINGAPORE — Home owners will need to brace themselves for even higher mortgage payments this year as an impending interest rate increase in the United States looms closer, prompting some analysts to caution that highly leveraged households sitting on floating rate plans risk being stung.

A key interest rate that the majority of housing loans in Singapore are based on could double by the end of the year and more than triple by the end of next year, possibly increasing monthly repayments by hundreds of dollars, depending on the value of the home.

The three-month Singapore Interbank Offered Rate (SIBOR) rose sharply for the second consecutive day yesterday, jumping 7.4 per cent to 0.62052 per cent from 0.57762 per cent on Monday, Bloomberg data showed. This came after a meteoric 26 per cent increase on Monday from last Friday’s 0.45738 per cent.

With the US Federal Reserve set to raise interest rates by September or October, as Mr Richard Jerram, chief economist at the Bank of Singapore, predicts, industry insiders say SIBOR could rise to 1.2 per cent by the end of this year and 2 per cent by the end of next year.

Commenting on the recent increase in SIBOR, Ms Selena Ling, head of treasury research and strategy at OCBC, said at a seminar organised by the bank yesterday: “It might be overshooting, as it is still the first few trading days and the market is still reacting to conditions in 2015. But I project that SIBOR will be close to 0.7 per cent at mid-year and will rise to between 1 and 1.2 per cent by the end of the year.”

Maybank Kim Eng said in a note in October that it expects SIBOR to rise to 1 per cent by year-end and 2 per cent by the end of next year.

Economists at the seminar noted that the property sector is most vulnerable as it is tied to interest rates, followed by real estate investment trusts.

“If interest rates rise at a slow and steady pace, home owners will be able to adjust,” said Ms Ling. “But if it is unwieldy and volatile, then that makes it a bit more tricky, because what you are seeing now is some correction in terms of property prices.” She added that overstretched and overleveraged home buyers might be more exposed to interest rate hikes.

Additionally, if the rate rises quicker than anyone predicts and passes the 3.5 per cent mark, the financial pain would start to have deeper repercussions.

“Interest rates will have to rise quickly and significantly — for instance, to 3.5 per cent — for bad loans to happen. That is when it will have an impact on the market,” said Mr Colin Tan, director of research and consultancy at Suntec Real Estate. “(But) if the projection is 1.2 per cent, our gross domestic product growth is still higher and if home owners still have a job, then they should be able to service their loans.”

Mr Tan also noted that the Total Debt Servicing Ratio framework implemented in 2013 will do its job of ensuring bad debt is less likely to happen. It uses an implied interest rate of 3.5 per cent to calculate applicants’ loan eligibility, he said.

Economists at the OCBC Seminar, which discussed the impact of the Federal Reserve raising interest rates, anticipate some volatility in the initial period after, but they also noted that things should stabilise after a short period of time as the raising of rates is, after all, a sign of growth.

“I don’t see this volatility as negative; it could be positive for mid-term investors. If people are heavily invested in equities, they may want to lighten their load. But this is also an opportunity to phase some investments in,” said Mr Vasu Menon, head of content and research for wealth management at OCBC. He estimates that this period of volatility could last between six and nine months.