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Inoculating against higher mortgage rates

China’s economic growth has slowed to a 24-year low while Europe’s economies are struggling with disinflation and possibly deflation. Analysts predict that the United States dollar will continue to strengthen this year as the world’s largest economy outperforms the rest of the world.

China’s economic growth has slowed to a 24-year low while Europe’s economies are struggling with disinflation and possibly deflation. Analysts predict that the United States dollar will continue to strengthen this year as the world’s largest economy outperforms the rest of the world.

So what? We live in Singapore. If you are a home owner or a prospective buyer, it matters.

Most floating mortgage rates here are pegged to the Singapore Interbank Offered Rate (SIBOR), which is the interest rate at which banks offer to lend funds to other banks. The SIBOR is correlated to the US dollar: Generally, as the Singapore dollar weakens against the US dollar, the SIBOR increases and local mortgage rates rise.

Since the US and Europe cut interest rates in 2008 in order to stimulate their economies during the global financial crisis, we have enjoyed rock-bottom mortgage rates in Singapore.

The Monetary Authority of Singapore said the three-month SIBOR has fallen from a high of 1.88 per cent in September 2008 to a low of 0.25 per cent in September 2011 and hovered in the 0.38 to 0.42 per cent range from 2012 through most of last year.

As a result, during this time, bank interest rates were significantly lower than the Housing and Development Board (HDB) concessionary loan rate of 2.6 per cent, incentivising HDB owners and buyers to take out bank mortgages in large numbers.

Recently, however, dark clouds have appeared on the horizon. The Singapore dollar has depreciated against the US dollar by about 8 per cent since the middle of last year. Meanwhile, the three-month SIBOR closed at 0.65 per cent as of Jan 20, data from the Association of Banks in Singapore showed.

How much more can we expect the SIBOR and mortgage rates to increase this year?

There are two schools of thought. Some analysts think that the three-month SIBOR could increase to 1 per cent and above, predicting that the US Federal Reserve will raise interest rates and the Singapore dollar will continue to depreciate due to the global movement to US dollars. If this turns out to be the case, we can expect our current bank mortgage rates of 1.5 to 2 per cent to go up.

The other school of thought looks at the world’s struggling economies and is not so sure that the Fed and other central banks will raise interest rates. These analysts see low inflation in the US, disinflation in Europe, and an upcoming presidential election as reasons for the Fed to refrain from tightening this year.

Since no one knows for sure how interest rates will move this year, homeowners should plan for the worst and hope for the best.

There are three ways that you can inoculate yourself against the possibility of rising mortgage rates.

First, in the low interest rate environment that we are still in, try to lock in the lowest possible mortgage rate for as long a loan term as possible.

Second, prepare for the possibility that your monthly mortgage payment will go up by cutting expenses or reallocating savings to cover the increase. We have been lucky with relatively low mortgage rates and have spent elsewhere what used to go to the mortgage. If interest rates go up, we need to reallocate those savings back to the mortgage. This can be psychologically painful, but it is doable.

Third, if you qualify for a HDB loan, do you go for the HDB concessionary interest rate or a private bank mortgage which will still provide significant savings?

Which way you go depends on your tolerance for risk and your cushion of savings.

If your view is that interest rates will not go up much more and you have savings you could put towards your mortgage payments in the event that rates go against you, then you should consider taking advantage of the low interest rates in the banking sector.

If you are concerned about rising interest rates or if an increase in your monthly payments would put your ability to meet your expenses in jeopardy, then you should consider a HDB loan or a bank mortgage that seeks to replicate the HDB loan. For example, POSB offers a floating rate loan that caps the interest rate below the HDB concessionary rate for the first eight years.

Seek advice from HDB advisers, bankers and other financial experts. Interest rates go up and down. There is always a solution, but it depends on your individual circumstances and is best arrived at by conducting research and working with experts who put your best interests first.

About the author:

Sam Baker is co-founder of SRX, an information exchange formed by leading real estate agencies in Singapore to disseminate market pricing information and facilitate property listings and transactions. For more details on the data used in this article, visit SRX.com.sg.

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