Impact Interest Rate Cuts Home Loans Good Time Refinance
According to recent remarks by US Federal Reserve chair Jerome Powell, the time has come to start decreasing interest rates, sparking anticipation of a rate cut at the upcoming Federal Open Market Committee meeting in September. However, the extent of the initial rate cut and the subsequent direction of rates remain uncertain, as stated by Jacquelyn Tan, UOB’s head of group personal financial services.
Associate director at Redbrick Mortgage Advisory, Clive Chng, suggests that Singapore has a history of following US interest rates, which means that when US rates rise or fall, so do Singapore and mortgage rates. Economist Chua Hak Bin, regional co-head of macro-research at Maybank Investment Banking Group, adds that interest rates in Singapore have already been declining in anticipation of US rate cuts. He also believes that mortgage rates will continue to drop as the Fed implements monetary policy easing.
Mortgage rates, especially for fixed-rate packages, have already begun to decrease, with two-year fixed-rate mortgages now available at nearly 3%. Additionally, the three-month Singapore Overnight Rate Average (Sora), the primary benchmark used by local banks for floating mortgages, has already declined. As of August 28, Sora stands at 3.572%, down from 3.701% at the beginning of January, according to data from the Monetary Authority of Singapore. Based on these figures, Chua predicts that the three-month Sora rate will drop to 3.4% by the end of the year, with a projected cumulative Fed rate cut of 50 basis points (bps) by 2024. He estimates further declines to 2.7% by the end of 2025.
Taking advantage of the trend of lower interest rates
With the expected drop in interest rates coupled with the discontinuation of the Singapore Interbank Offered Rate (Sibor) after December 31, homeowners should take advantage of the lower rates and consider refinancing their existing mortgages, advises Chua. However, he warns that some homeowners with a mortgage pegged to Sibor may be in for an unwelcome surprise. As Sora tends to be higher than Sibor, homeowners should carefully review and shop around for more attractive mortgage deals if their financing rates have increased due to the transition to a Sora benchmark. According to Chua, both current and new homeowners in Singapore stand to benefit from lower financing rates.
Senior director of research and data analytics at Huttons Asia, Lee Sze Teck, provides a hypothetical example of how a drop in interest rates could benefit home buyers. Assuming a home loan of $1 million and interest rate of 3.6% over 30 years, the current estimated monthly mortgage installment would be $4,546. By the end of 2024, if interest rates were to drop to 3.1%, the monthly installment would decrease to $4,270, resulting in monthly savings of $276. Lee adds that buyers should also be aware that the lower mortgage rate could potentially increase the loan amount they qualify for.
Reprice or refinance?
Refinancing offers an opportunity to optimize mortgage terms, lower interest rates, and enjoy lower monthly installments according to UOB’s Tan. Homeowners may also change their loan type and features in response to market offerings and trends. However, Tan points out that refinancing and transitioning to another bank can incur additional costs, such as legal and valuation fees, prepayment penalties, or clawback of subsidies. As such, homeowners should calculate whether the total additional costs outweigh the potential savings of refinancing.
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Some homeowners may opt to reprice or switch their loan package to a new one with the same bank, but this could result in repricing fees. Others may prefer to refinance by changing to a bank that offers a more favorable home package. However, as OCBC head of home loans, Maryanne Phua points out, refinancing may result in the loss of higher interest on savings accounts.
At OCBC, there are one-, two- and three-year fixed-rate mortgage packages, as well as floating rate packages pegged to the three-month Sora. According to Phua, the two-year fixed-rate package remains the most popular, with a price that is around 0.35% lower than what it was a year ago. Some banks, such as Redbrick Mortgage, offer free conversion between fixed and floating rates after one year, or a one-year fixed interest rate with a two-year lock-in period, allowing homeowners to take advantage of a variable rate package in the second year. In today’s competitive loan market, banks may attempt to entice clients by waiving legal and valuation fees for those seeking to refinance, adds Huttons Asia’s Lee.
As Singapore has adopted an “appreciation stance” on monetary policy to curb inflationary pressure, Tan says that interest rates are not expected to experience significant declines. She does not anticipate domestic interest rates to mirror those of the US, barring an economic recession.