This article was originally on GET.com at: Interest Rates Will Rise In 2016 - How Will This Affect Home Loans In Singapore?
Home loan repayment is one of the highest consumption items for households in Singapore. Ideally it can only take up to 35% of your gross income if you don't have any other debts (MoneySense, Singapore's national financial education programme, recommends that your total debt should not exceed 35% of your gross income).
However, keep in mind that the Mortgage Servicing Ratio (MSR), i.e. proportion of your monthly gross income spent on mortgage repayment, cannot exceed 30% for purchase of HDB flats.
Also, your Total Debt Servicing Ratio (TDSR) cannot exceed 60% of your gross monthly income. And remember that apart from home loans, this includes car loans, education loans, personal loans, credit card debt, and all other debts.
According to the Department of Statistics Singapore, 90.3% of Singapore households in 2014 were homeowners. And it is common to have floating home loan rates that are linked to SIBOR and SOR.
Compare New & Refinance Home Loan Rates
It's important to understand that SIBOR and SOR interest rates are affected by the US Federal Reserve, which is hiking up its rates for the first time in nearly a decade.
Singapore banks are first and foremost regional intermediaries. According to the recent October 2015 report from the Federal Reserve Bank Of San Francisco, Singapore banks are now borrowing mainly from developed Asian countries, New Zealand and Australia, before lending out to emerging Asian countries.
So the consequence of the Fed raising interest rates is that the cost of funds will rise as Singapore banks will have to pay more to their lenders, as well as higher rates when borrowing from each other.
In addition, international capital moved out of the US in search of higher yield when the Fed cut interest rates to 0.25% in 2009. Now that the Fed has raised interest rates, the market projections expect investors to pull out $541 billion from emerging markets in 2015 alone, according to CNBC.
This is expected to accelerate in 2016 and this will put even higher pressure on the cost of funds for local banks.
Historic Fed Rate Hike
The Federal Reserve moved to raise interest rates by 25 basis point on 16 December 2015 and this is a significant event for home owners. The exact words that changed this are:
“Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent”
What drove the Fed to raise interest rates after nearly a decade?
Fed Chair Janet Yellen explained this clearly in her press conference as quoted below:
“It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans. And it reflects the Committee’s confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way, although it is not yet complete.”
In other words, the Fed raised interest rates because the US economy had a strong recovery and higher interest rates are now appropriate. One has to remember that when interest rates are low, it comes at the expense of savers in insurance and pension products.
We can gauge the recovery of the US economy from the labour market. After peaking at 10.2% in October 2009, the unemployment rate is now at 5.0% as the US economy expanded steadily.
Wages are also rising in the US as a tightening labour pool forces companies to pay more for talent. Wages range from an average of $16 per hour to $21 per hour.
Among all the advanced economies, the United States remained on the firmest path of economic recovery. This is part of the ongoing global recovery story which is supported by research by Goldman Sachs.
Interest Rates Rise In Anticipation
Interest rates for home loans had risen before the actual Fed rate hike way back in October. The strong recovery in the United States had led the market to anticipate this rate hike for the past 2 months.
On December 15, the Straits Times reported that interest rates in Singapore had been inching up prior to the actual rate hike on December 16. Interest rates had moved up steadily since October and spiked on the week before the Fed hike.
This latest rate report came from Association of Banks Singapore (ABS) which provides SIBOR and SOR rate updates on a weekly basis. SIBOR and SOR are closely linked and they move in the same direction. Here you can learn more about SIBOR and SOR home loans.
The key rate to look at for home loans is the 3-month SIBOR rate as this is the rate which most home loans in Singapore use.
The Federal Reserve chair Yellen announced her intention to hike rates during the 03 December 2015 speech to Congress. During her speech, she dropped an important hint that is quoted below.
“Let me now turn to where I see the economy is likely headed over the next several years. To summarize, I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment and a rise in inflation to our 2 percent objective. Although the economic outlook, as always, is uncertain, I currently see the risks to the outlook for economic activity and the labor market as very close to balanced.”
Employment and inflation are the twin mandate of the Fed. So when the Fed chair announced that both targets are about to be met, it was a strong signal for the market.
However, there were only minor changes in the 3-month SIBOR rates which rose to 1.13375 percent from 1.13275 percent which is an increase of only 0.001.
What Will Interest Rates Be In 2016?
The Fed promised a gradual rate hike and pledged to keep monetary conditions accommodative. Hence for borrowers, they should be focused on the pace and level of the rate hike in 2016.
So the questions we should be asking are: where will interest rates be in 2016 and how fast will they raise?
The popular forecast within the Fed itself would be that the Fed Funds rate would be at 1.5% in 2016.
This view is supported by Goldman Sachs chief economist Jan Hatzius as he cited the cumulative progress made in the US economy.
The bond market had already priced in this move. However if you asked Deutsche Bank Securities' chief economist Peter Hooper, he would expect the Fed to reduce the pace of interest rates and only raise them very gradually due to issues such as a weak manufacturing sector and a strong USD.
So who is right? Only time will tell.
As a home owner, you should move early in anticipation of the rate hikes next year which are likely to triple (0.5% to 1.5%) by the end of 2016.
What can you do? You can refinance your floating-rate home loan to a fixed rate home loan or you can refinance to a longer interest rate term (e.g: 12-month SIBOR) instead of the standard 3-month SIBOR.
Here at GET.com, you can compare home loans to find the cheapest home loans in Singapore.
Compare New & Refinance Home Loan Rates
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