Unless you’re planning to purchase an overseas football club, buying a home is probably the biggest financial commitment most Singaporeans will make in life. That’s why it pays, in more ways than one, to understand how fluctuating interest rates could affect your monthly mortgage.
If you bought your home some time after 2008, you’d have enjoyed relatively low mortgage payments these past few years, thanks to historically low interest rates. Much like those must-have shoes you bought on sale years ago, but have only worn once since, your mortgage payments might even be out of sight, and out of mind.
However, if your housing loan is based on variable interest rates – and why shouldn’t it be, given how low rates have been since 2008 – you should be aware that interest rates are gradually creeping back up. This means your monthly mortgage payments would also now increase. But why is this happening?
Making sense of the SIBOR
Many banks in Singapore peg their interest rates to the Singapore Interbank Offered Rate, or SIBOR in short. Used as a reference rate, it is based on the interest rates used by banks in Singapore when lending unsecured funds to each other. Put more simply, the SIBOR reflects how much it would cost banks to borrow from each other.
So why has the SIBOR been at historically low levels for almost 10 years? As MAS relies on international exchange rates to set policy, the SIBOR is influenced by the US Federal Funds Rate, as well as the Singapore-US Dollar exchange rate.
Since the global financial crisis, the US has been maintaining near-zero interest rates as part of their monetary policy. As a result, the SIBOR dropped from 3.5 per cent in June 2006, to a mere 0.25 per cent in November 2014.
This was good news for property buyers as they could potentially save hundreds of thousands of dollars in interest payments. If you had taken a $500,000 property loan in late 2014 instead of mid 2006, you could have saved over $200,000 in interest payments – almost what a two-room HDB flat costs nowadays!
So why is the SIBOR rising?
Alas, we know only too well from past experience that good things don’t last forever – think school recess time, Black Friday sales and holidays.
In January 2015, the SIBOR increased sharply from 0.41 per cent to 0.64 per cent, causing some alarm among investors. In March, it soared above 0.9 per cent for the first time since 2008, doubling the level seen at the beginning of this year.
The spike in SIBOR can be partly traced to the weakening Singapore dollar against the greenback this year, where the US dollar rose to its highest value in five years. In February, the US dollar gained further momentum with a very strong job market where 295,000 net new jobs were created to drive unemployment to a seven-year low of 5.5 per cent.
How are you affected?
So does a stronger US dollar spell doom and gloom for everyone? Not necessarily… unless you’re planning an online shopping spree at Amazon. In spite of the rising SIBOR, your monthly mortgage payments should not increase too drastically.
If you took a bank housing loan of $500,000 in March 2015, at an interest rate of 1.90 per cent, your monthly mortgage would be $2,095. This compares rather favourably to the $1,907 (at a bank interest rate of 1.10%) you would have paid six months prior.
As can be seen, there’s no significant increase in your home loan repayment yet, since current SIBOR levels are still historically low. Cited in media reports, UOB has predicted that SIBOR will go up to 1 per cent this year, while Credit Suisse predicted a rise to 0.8 per cent – still a long way off 3.5 per cent in June 2006.
However, the difference could add up significantly over time. If your loan term is 25 years, you could be paying an extra $50,000 in interest! That’s almost enough to buy you the COE for a mini-van in a good month.
If you’d like to find out how current SIBOR levels are affecting your monthly loan payments, use our handy Mortgage Repayment Calculator.
What should you do?
Once the lock-in period of your housing loan is over, you are free to refinance your mortgage with other banks, and negotiate for a more attractive rate. This would greatly help you save on your interest payment every month.
By spending a few minutes with our Mortgage Refinancing Calculator, you could benefit by saving a few hundred dollars every month. Find out how much you can save by refinancing your mortgage using our Mortgage Refinancing Calculator.
If you find it too time-consuming to talk to each bank individually about their home loans, then our Mortgage Marketplace is just the place for you. With a comprehensive selection of the most attractive bank loan packages in Singapore, it helps you choose a smart solution that best suits your needs. Check out Mortgage Marketplace at http://www.propertyguru.com.sg/mortgage/home-loan
In conclusion, even though the rising SIBOR is causing your monthly mortgage to increase, there is no real cause to panic yet. Take some time to calculate how your mortgage is affected, study your refinancing options, and choose a solution that can help you save over the long term.
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