How Should Home Buyers And Owners Cope With Rising Interest Rates?

Mr Alfred Chia BSc, CFP, FChFP, ChFC, SAMP, Affiliate of STEP, IBF Fellow
CEO, SingCapital Pte Ltd

This article is contributed by SingCapital.

It appears that the years of cheap loans are well and truly over. In the past decade or so, property buyers and owners have enjoyed very low interest rates after the Global Financial Crisis in 2008, as central banks in advanced economies kept rates low or even near zero to stimulate economic growth. Just when rates started to inch up towards 2019, the Covid-19 pandemic struck in 2020, snapping the momentum in further rate hikes then.
As it stands now, market consensus seems to point to further increase in interest rates. In recent weeks, we have seen banks revised their fixed rate packages, with some loan rates now nearing or crossing 3% at the time of writing.

PropNex Picks checks in with Alfred Chia, CEO of SingCapital for his take on the interest rate outlook and how the rate hikes will impact home buyers and property owners who are still financing their home.

1. Why Are Interest Rates Rising Now?

Due to high global inflation, most central banks are raising interest rate led by US Federal Reserve. In US, inflation rate had hit 8.6% in May 2022, which is the highest since 1982.

The quickening inflation is partly supply push and also demand driven – the periodic lockdowns due to China’s zero-Covid stance, and the ongoing Russia-Ukraine war has further fed supply chain woes. Meanwhile, the reopening of economies as more countries take the decisive steps towards living with Covid-19 has spurred demand for goods and services. The confluence of this supply crunch and demand recovery has fuelled inflation around the world.

In order to tame this high inflation, US Fed is raising interest rate to combat it. In June 2022, the US Fed accelerated its tightening cycle with a 0.75% rate hike. Their goal is to bring inflation to 2%. This is a far cry from where it is now. Therefore, markets are expecting more rate hikes as the US Fed work on this daunting task.

2. What Is The Impact Of High Interest Rates On Consumers And Businesses?

Interest rate and economic growth tend to have an inverse relationship. Simply put, when interest rates are low, households and companies may spend more and ramp up on investments, which in turn will help to drive productivity and spur economic growth.

Conversely, when interest rates are rising higher, consumers may become more cautious and change their spending patterns; businesses may also opt to hold back on expansion plans, keeping some powder dry to deal with any unforeseen events. Hence, a high interest rate is not favoured by the economy as it increases the cost of borrowing, which can trigger a recession - if consumer and business spending falls drastically. In addition, excessively high interest rates can be damaging for home owners, especially those who are highly leveraged.

3. What Is Your Interest Rate Projections For The Rest Of The Year And In 2023? How Much More Monthly Payments Could Homebuyers Be Looking At?

Singapore interest rate packages are divided into SORA- pegged and fixed rates package. SORA refers to the Singapore Overnight Rate Average which is the actual average rate of borrowing transactions between banks in Singapore between 8am and 6.15pm. It is a rate used by banks to determine various types of loans.

We expect SORA will rise when US Fed rates increase, though it may not be in the same quantum. The US Fed is widely expected to hike rates, likely to cross 3.5% by end of 2022. Should that happen, SORA-pegged mortgage rate (SORA plus Bank Premium) will exceed 3%. Meanwhile, fixed rate home loan rates have already touched 3.08% for a 3-year fixed rate package.

As an illustration below, a borrower taking out a loan of $900,000 from the bank will see his monthly repayment rise from $4,152 on an interest rate of 2.75% to $4,506 when the borrowing rate jumps to 3.50%.

Source: PropNex Research

4. In View Of The Rising Rates, How Should Home Buyers Decide Between Fixed Or Floating Rate Packages When Financing Their Home? What Are The Key Considerations?

While current SORA-pegged packages are still attractive, it can increase rapidly depending on actions by the US Fed. The current fixed rate is a reflection of how mortgage rate will be going forward. I would recommend home owners to go for fixed rate (3 years-period type) as interest rate may increase higher in year 2023. In addition, with a fixed rate package, buyers can also have more certainty on their monthly payment amount during the years when rate has been fixed, making it easier for financial planning.

Financing a home is a long-term commitment and buyers should ensure that they can comfortably cover the loan payments, with spare funds set aside for savings and emergencies. Job security, income stability, existing financial commitments and ongoing expenses should all be considered when deciding how much debt to carry for home purchase.

For those buying HDB flats, they can also check their eligibility for an HDB home loan, which has a concessionary interest rate that is pegged at 0.1% above the prevailing CPF Ordinary Account interest rate. At the time of writing, this concessionary interest rate is at 2.60% p.a.

5. Apart From Housing, How Will Rising Interest Rates Affect Personal Finance And Investment?

Rising interest rate is normal in a strong economy especially since we have been in a very low interest environment following the Global Financial Crisis. Rising interest rate is not necessarily bad. In fact, it is essential to ensure growth is sustainable and to maintain a stable inflation rate.

As discussed in question 1, there are global uncertainties which are giving markets jitters. On the other hand, if China situation and Russia/Ukraine crisis are resolved, runaway inflation can be tamed, which will not lead to excessive interest rate hike.

Whether you are home owners or equities investors, there is a need to be calm and to focus on fundamentals such as:

1. Prudent financial planning to manage your finances
2. Home buyers are subjected to Total Debt Servicing Ratio Framework (TDSR) to assess and mortgage stress-test their loan eligibility
3. You need to invest to beat inflation. Otherwise, money value will be eroded
   

Every crisis brings opportunities. It is important to be financially prudent and examine the potential investment opportunities.

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