The United Stated Federal Reserve (the Fed) has cut interest rates to almost zero. This may seem unconnected to Singapore’s property market, but I can assure you it’s not – in fact, the last time something like this happened was in 2009; and back then, it helped fuel the rise of property values to a new peak in 2013. Here’s why Fed rate cuts are so eagerly desired by Singapore’s property buyers:
Understanding the connection between Fed rate cuts, and Singapore home loan interest rates
Many (but not all) Singapore home loans are pegged to an index called the Singapore Interbank Offered Rate (SIBOR).
SIBOR is the median interest rate between 12 participating banks. Many home loans in Singapore are a combination of the bank’s spread (the charges), plus the prevailing SIBOR rate. For instance, a home loan may be expressed as:
- Year 1: 3M SIBOR + 0.4%
- Year 2: 3M SIBOR + 0.4%
- Year 3: 3M SIBOR + 0.4%
- Year 4 and thereafter: 3M SIBOR + 0.9%
This means that, for the first three years, your interest rate is the prevailing three-month (3M) SIBOR rate, plus the bank’s spread of 0.4 per cent. On the fourth year, it will jump to the prevailing 3M SIBOR rate plus 0.9 per cent.
The SIBOR rate changes constantly, and it moves in tandem with interest rates in the US. So when the Fed cuts the interest rate, SIBOR will move down, and your home loan will get cheaper.
You can check the current SIBOR rates on The Association of Banks in Singapore (ABS) website.
The SIBOR rate changes constantly, and it moves in tandem with interest rates in the US. So when the Fed cuts the interest rate, SIBOR will move down, and your home loan will get cheaper.
You can check the current SIBOR rates on The Association of Banks in Singapore (ABS) website.
- What are the implications on property buyers?
- Lower home loan interest means greater affordability
- Higher rental yields and eventual resale gains
- There is an “opportunity period” before banks raise their spreads
- HDB owners who switched to bank loans have really won out this decade
1. Lower home loan interest means greater affordability
Let us consider a home loan of $1 million, with a loan tenure of 30 years. At an interest rate of 2.1 per cent per annum (quite common before the rate cut), this comes to monthly repayments of about $3,745 per month.
But what happens if the interest rates falls to just 1.4 per cent (possible with the steep rate cut)?
This lowers repayments to around $3,400, or about $345 per month less. This is enough to cover someone’s insurance premiums, start a new savings plan, or pay the maintenance in many condos. This improves overall affordability of homes for buyers.
Note: The lower interest rate will not affect your ability to pass the Total Debt Servicing Ratio (TDSR) requirement. This is because banks will measure your TDSR using an interest rate of 3.5 per cent, regardless of what the actual loan rate is; this is to ensure you can cope if rates rise later.
2. Higher rental yields and eventual resale gains
Your net rental yield is the annual rental income, divided by the total costs of the property including the interest repayments. As such, a lower interest rate contributed to better overall yields. Likewise, the less interest you pay, the more you can potentially make when you eventually resell the property.
Now there isn’t a straightforward way to calculate this, as the interest rate changes (SIBOR fluctuates) – so you will only know the final number when you actually resell the unit. However, let’s use a simplified estimate:
In the above example, a loan of $1 million at 2.1 per cent, over 30 years, comes to total interest payments of around $348,700. At a rate of 1.4 per cent, it comes to total interest repayments of roughly $225,230.
That’s a difference of around $123,470.
Again, please remember this is just a simplification, as the rate will keep changing over the course of the loan. There are no perpetual fixed interest rates for Singapore home loans.
For a deeper look at rental yields, potential resale gains, etc., do contact me and I will be happy to help; I’m a qualified realtor with extensive experience in helping both home buyers and pure investors.
4. There is an “opportunity period” before banks raise their spreads
Once SIBOR rates fall very low – as they are about to – banks will start to raise their spread on the next batch of home loans.
This means there is only a brief window of opportunity, in which there are still home loan packages with low spreads. If you’re able to secure these loan packages, you can save a great deal on interest rates.
Do bear this in mind and act fast, if you’re shopping for a home loan right now. If you’re a home owner with an existing mortgage, you can consider quickly refinancing to a better loan package.
There are many mortgage brokers online who will help you to refinance / get the cheapest loan. They don’t usually charge you any fee for it.
5. HDB owners who switched to bank loans have really won out this decade
Please do not take this advice to switch your HDB loan to a bank loan. However, I just want to observe that HDB owners who chose the bank over HDB Concessionary have really won out, in this decade of the property cycle.
You see the first time we saw the Fed cut rates to zero, it was in 2009, almost exactly a decade ago. This sent interest rates to the lowest levels we’d ever seen, and some packages were even below 1.2 per cent per annum. This was way below the HDB loan rate of 2.6 per cent.
However, flat owners were repeatedly warned that home loan rates would rise dramatically, once the US recovered from the Global Financial Crisis.
Well here we are in 2020. And over the past 10+ years, the interest rate did indeed climb – but few loan packages climbed past the 2.2 per cent mark. And now, just as it seemed their lucky streak was going to end, the Fed slashed interest rates to near zero again.
At this point, these flat owners would have paid a lower interest rate than the HDB loan, for almost half of their 25-year loan tenures. Assuming rates stay low – and they’re likely to even after the virus, as economies need time to recover – these flat owners have really had a small windfall.
(But please don’t run out and refinance into a bank loan from your HDB loan; you can’t change it back later! Get some expert advice first).
All of this points toward a very strong buyers’ market for 2020
If you’re a buyer, it seems like you hold all the cards in the coming year. A combination of Covid-19 fears, high supply of homes, and now low-interest rates are all working in your favour.
But don’t let it make you reckless – you still need to be careful in picking a property that’s recession resistant, and is good value for money. We’re not out of the woods yet, as far as the wider economy is concerned.
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