Mhm Hello and welcome. I'm Jonathan Pierce from the money mine team here at C. N. A. And I'll be looking at the five things you need to know about rising mortgage rates in Singapore joining me now are Clive chung, Associate director at Red brick mortgage advisory and Christopher tan ceo of wealth advisory firm Providence gentlemen, welcome to the show. Great to be here. Thanks for having me Jonathan.
So let's kick off the discussion with you Clive, could you tell us what benchmark rates are actually used in Singapore mortgages and by how much have they risen over the past months and how high can they still go? The benchmark rates that are primarily used in Singapore mortgages? Today it's Sora or the Singapore overnight rate average. It can be a one months or a or a three month sora.
Prior to this, it was actually the benchmark called cyber the Singapore Interbank offered rate at the beginning of the year 2022 the one month Sora was sitting about 0.2% today, the one month Sora is sitting at 0.65%. So that's an increase of 45 basis points when you're looking at the three months or a It started at the beginning of the year at 0.19%. And currently the three months Alright is sitting at about 0.45 chris what are your views on this? Have we reached a peak yet? In your opinion?
I don't think so the general views is the interest rate will continue to rise and the primary reason we all know is mainly due to inflation. The US government is trying very hard right now to fight inflation and in the recent months, not only they have raised interest rate, the Fed funds rate, but they have also pledged that they will continue to do so Until price becomes stable and we're expecting the Fed funds rate to go up to about 2.5-2.75% by the end
of the year. So I think consumers, whether people who are taking a housing loan or taking any sorts of loans have to expect that interest rate will continue to rise throughout the year.
Are there any particular segments chris that will be most affected by rising mortgage rates?
People who are taking a loan right now, especially if they are on a previous package and they are finishing up the lock up period if they're on a fixed loan and they need to consider reprising their loans or refinancing their loans. These are the people who, they will be most concerned because what that means is that going forward, they may have to pay a high interest and that means that they are going to expect a
higher expense in the family. Of course, the people who are buying a house right now, I think it will affect them. This is the point in time whereby they have to think about whether I should go on fixed rate or whether I should go on floating. There are people who also will need to take a look at the size of the house that they can really afford, you cannot just depend on the current loan rate.
People considering buying a house right now, they have to expect interest rates to go up higher than what it is right now and determine whether you can really afford buying that property
now, Clive obviously, you know, homeowners and property investors have different priorities right now, but what is the biggest dilemma facing both these two segments, Like what Christopher mentioned, rising interest rates aren't the only deciding factor to whether to buy a property or not back in 2019, a three year fixed interest rate was as high as 2.68% and at one point it even moved up to 2.88% and we still saw the market picking up people still bought properties
but of course when you're looking from an investment perspective with rising cost of funds, your financing becoming a little bit more expensive, of course that erodes into your potential returns, but in the long term I think people still buying two properties and hold the properties over the long run because it is a good hedge against inflation, especially right now when inflation is so high chris so obviously homeowners are being hit not just by
mortgage increases, but also inflation, high petrol prices etcetera chris are there any strategies that homeowners can adopt, like should they actually consider refinancing or re pricing their loans? Now,
the main culprit is really inflation. So like what Clive has said, if there is a reason why you want to buy into that property, whether it is for family is for you to stay and there are a really good reason why you want to buy that property or you feel that that is really a good investment and you have confidence that you just need to weather through that period and what that means is that you really need to cut down on some of your expenses right now, have to cope with the increasing rates and
not just increasing interest rates, but also inflation, making things very expensive. You might want to look at cutting down the non essentials with governments, increasing interest rates. It might also mean that we might go into a recession, you may lose your job and what that means is that you really need to have enough emergency fund right? Not just in cash, but perhaps even in your ordinary account and you're going to take other kinds of loans to buy a big ticket item right now, maybe like
a car, which is really not essential. I will caution that perhaps this is not the best time to take a big loan, especially buying the things that are not necessary. Now, better refinance or reprise Clive will have a better take on this
When we're talking about mortgages in Singapore, the people who are immediately impacted at this point of time are people who refinanced a loan, for example, in 2019 or 2020 and on a floating interest rate on cyborg because cyber and the past couple of months have increased quite drastically. So if you're coming out of your lock in period, you should definitely re look into the market
to re price or refinance. Now, when it comes to re pricing and refinancing, there are some differences with the banks. If you're re pricing your loan, you might get the same interest rates that they're offering to their new to bank clients, but you might also get higher interest rates and there's
also going to be a fee for reprising. So sometimes it might be even cheaper to do a refinancing because the banks will provide you with cash rebates, legal subsidies to offset the cost of refinancing and you get new to bank rates as well. Interest rates are always cyclical, Maybe in the short term stretching your loan tenure when you're doing a refinancing, that allows you a better cash flow Because stretching the loan 10or just means bringing your money installments down.
Now, if I'm a homeowner and I want to extend my loan tenure, as you say, do I opt for fixed or floating rates in this current climate. Prior to this podcast, I was having a conversation with Christopher and we were talking about fixed interest rates potentially already moving up to the 2.45% mark for a two year fixed interest rate and a 2.6% for a three year fixed interest rates. Whereas when you look at the floating interest rate, you're sitting at about 1.151.2%.
So the gap is significantly large, 1.3%, for example. So homeowners are in a dilemma. Should I go for fixed interest rates, pay 2.6% for a three year fixed interest rate where I can actually save more than 1% or should I just go for a floating interest rate at this point of time today there is gaining traction for people moving into the floating interest rate market and
they are moving into packages that limit the exposure. So if you're on a one year lock in period on a floating interest rate at the end of one year, of course you have the ability to refinance to re price, stretch your loan tenure, you have the ability to partially prepare if you want to
just want to offer my point of view in the past where by the gap between the fixed rates as well as the floating rates are very narrow, it is easy to make a decision and a lot of us will go just go into fixed rates because, well there is not much incentive going to floating rates since the gap, it's so narrow. But currently as what Clive has mentioned with the gap widening, it's very tempting to go into floating.
Ultimately, it also depends on the risk tolerance of people who are taking a housing loan. If taking a fixed rate right now is going to give you peace of mind, then I would say go for the peace of mind, even though financially speaking, it may make sense to go for a floating rate. The whole purpose of money is to enable you to live the life you want and you want to be able to sleep peacefully at night. So sometimes what I call life decision is more important if it makes you sleep well, how
do you put a price on peace of mind?
Yeah, you can't, you can't,
we're talking about the five things you need to know about rising mortgage rates here in Singapore, we've discussed how mortgage rates will keep increasing throughout the year as policymakers move to rein in inflation, Those who refinanced or bought their properties 2-3 years ago could be most impacted. And homeowners now face a dilemma as the gap between fixed and floating rates widens and lastly, one strategy they can explore is refinancing their loans and opting for longer
tenure to bring monthly installments down. Now, moving on without discussion, Clive, what is your rule of thumb when evaluating property loan packages if you're purchasing a property, get a loan eligibility done to ensure that you're not overstretching yourself in terms of taking on a huge mortgage mortgages in Singapore are relatively straightforward. You're locked in for a couple of years or three years depending on the
package that your going into. And within that period of time you have very little number of things you can do. You want to be able to search for packages in the market that offer you flexibility and there are packages in the market that allow you to make partial pre payments and also sell the property within the lock in period without any penalties at all.
And if you're purchasing a property for example then you have to look at the different banks and the different credit policies at the end of the day, the banks will look at it case by case basis. They will always look at your credit history for the last 12 months.
There are many things to consider in the market depending on your needs, depending on how old, you are depending on where you are in life, what's affordable, what's not affordable, how much cash you have on hand only then will you be able to make a decision on which mortgage package to go into chris this issue of homeowners being over leveraged in your opinion, are there mechanisms in place to prevent this? And is it enough? Right now,
there are plenty of government measures to prevent someone from over borrowing, we have the loan to valuation ratio that's currently 75% for bank loans and 85% for HDB loan TDS. Our total debt service ratio, which currently is 55% of the monthly income, which means to say that a person, their total loan monthly payment Should not be more than 50% of the monthly income. The other one is a mortgage servicing ratio in my
area of work. Generally we advise people not to cross 40% and even when you touch 40% we think that you are stretching yourself a bit even though you can afford 55, you might want to reconsider something, lower. especially for a time like this whereby it's pretty uncertain. We have never seen inflation rising up so fast in such a short period of time. Those are all indicators for possible recession. We might lose our jobs so just be very careful.
But of course, you know, we have that old proverb right with every crisis could also be an opportunity. So let's end off today on a little bit positive note chris what are the risks and rewards of investing in property When interest rates are rising?
When we invest into a property. We are looking at rental income as one some retirees like it because it gives them a steady stream of income. We are looking at capital appreciation of that property and that's provided of course you buy the correct ones at the correct location and the biggest return in the Singapore property scene really comes from the leverage because without the borrowing, if you look at the U. The rental you're the property is not that exciting.
But once you leverage it then becomes very exciting. But Darren lies the risk as well and we are seeing it right now. Well if interest rates continue to go up and in the past, if you have bought that property and you stretch it to the maximum you might be in trouble, especially if you lose your job. And we know that we don't exactly have liquidity when it comes to property, it takes time to sell six months, nine months before
the whole transaction is over. There is the risk of endless government cooling measures, you know, and when they have those cooling measures they don't tell you in advance. So these are the risks and rewards. But allow me to end with this firstly, I'm not saying no for property it's a good asset, especially in an inflation environment is a hard asset which well typically it does well in an inflationary environment but please make sure that your financial health is good before
you go into long term investing. That's one. The other thing is when it comes to buying property for a lot of people, it may mean a large part of your asset allocation after you buy the property, you may not have other resources left to invest in other things. So there's not enough diversification there. And if that property fails you then your overall investment portfolio may not do very well because
you're over concentrated into a very big asset. So diversify and be very careful when you buy, don't over leverage yourself. That's my key message.
Apply final thoughts with and rewards generally properties are safe havens in Singapore. Like what chris mentioned, the rate that property has grown is faster than inflation. It's really time in the market rather than trying to time the market right? So buying a property and being in the property for a longer run generally gives you a decent return.
Have a diversified portfolio. Don't try to time the market not be too overly concerned about interest rates at this point of time because they move up, they move down on average in Singapore itself, interest rates are still considered quite low. If you compare it to the rest of the world. Clive and chris thank you very much.
Thank you very much. Thanks for having me.
You're most welcome. Thanks for having us, Jonathan, appreciate your time now to recap mortgage rates in Singapore have not peaked and will keep rising throughout the year. As policymakers move to rein in inflation. Those who refinanced or bought their properties 2-3 years ago could be most impacted by rising mortgage rates and homeowners now face a dilemma as the gap between fixed and floating rates widens.
Homeowners can opt to refinance their loans and go for longer tenure to bring monthly installments down. While mechanisms are in place to prevent over leverage, homeowners should not overstretch themselves when choosing a loan package and finally, property remains a safe haven investment. But it pays to be aware of the risks and rewards and to stay diversified. And those are the five things you need to know
about rising mortgage rates in Singapore. Thanks for listening money miners every saturday at 10 30 PM on media cops C N A. You can also catch us online at CNN dot asia or on youtube.