SINGAPORE: Home owners hoping for some relief from their monthly mortgage repayments may be in for some disappointment, even if a benchmark local interest rate, which many home loans are pegged to, has edged down following a recent rate cut by the US Federal Reserve.

This as some banks have begun trimming their home loan interest rates as early as April in anticipation of the Fed’s move, market watchers told CNA.

Further tweaks to mortgage rates will have to depend on confirmation of future US rate cuts, which remains unpredictable due to a bubbling trade war, and domestic economic factors, they added.

DBS and UOB were among the early movers earlier this year, said Redbrick Mortgage Advisory’s associate director Clive Chng.

Fixed-rate packages, for instance, saw home loan rates lowered to between 2.38 per cent and 2.48 per cent in April, from around 2.58 per cent to 2.68 per cent, he added.

Rates below 2 per cent emerged by mid-July, according to several comparison sites, with a three-year fixed-rate home loan package by DBS having a first-year rate of 1.89 per cent. This “National Day special” has since ended on Aug 15.

There have been no further tweaks in home loans since the Fed’s rate cut, said SingCapital’s chief executive Alfred Chia, who does not expect any in the near term given how mortgage rates have dipped prior to that.

Mr Chng said: “Banks from time to time, in a bid to capture market share, do offer promotional rates.”

“But the Fed rate cut on Jul 31 was in a way already baked into the market and did not have measurable impact on consumers,” he added.

READ: FHR vs SIBOR: When it comes to loans, which home mortgage works best for you?

FED, SIBOR AND HOME LOANS

Following nine rate hikes since it began normalising policy in December 2015, the Fed cut its benchmark interest rate by 25 basis points on Jul 31. This is the US central bank’s first rate cut in more than a decade. 

Typically highly correlated with US interest rates, the Singapore interbank offered rate (Sibor) – a rate at which banks lend funds to one another – has come off.

The three-month Sibor –  key benchmark to price most home loans here – was seen at 1.87933 on Aug 14, down from 1.99758 before the Fed’s rate cut. 

Still, this is notably higher than the 0.4 per cent mark that the benchmark rate hovered around from late 2010 to 2014, as US interest rates were kept near zero.

Since the Fed signaled the end of cheap money in the US in late 2015, the three-month Sibor has risen steadily. It hit a more than decade-high of 2.00746 around end-May, according to Bloomberg data. The last time the benchmark rate stood higher than that was in the last quarter of 2007. 

As Sibor trekked north, interest rates on mortgages here increased in tandem. The biggest rise in home loan rates was in 2018 when the Fed did four rate hikes, said market watchers. 

For instance, fixed-rate packages started 2018 at around 1.58 per cent before rising as high as 2.68 per cent by the year-end, according to Mr Chng.

READ: Commentary: Consumers feel the pinch of rising interest rates

WHAT’S NEXT

With last month’s Fed rate cut, the three-month Sibor “has probably peaked”, said Maybank Kim Eng senior economist Chua Hak Bin.

Yet, economists that CNA spoke to do not expect a sharp drop.

Dr Chua has a year-end forecast of 1.8 per cent for the benchmark rate. Over at OCBC, the year-end forecast has been revised down to 1.86 per cent since the Fed’s decision.

This boils down to two reasons.

One is the increasing likelihood that the Monetary Authority of Singapore (MAS) will ease policy at its next scheduled meeting, after the Singapore economy grew at its slowest pace in a decade for the second quarter. 

“If MAS eases monetary policy, implying that there will be less appreciation of the Singapore dollar, rates may go up,” said OCBC’s head of treasury research and strategy Selena Ling.

Instead of setting interest rates, the MAS operates a managed float regime for the Sing dollar, allowing the exchange rate to fluctuate within an unspecified policy band. It changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the local currency. 

“Typically if you have a strong currency, funds will flow in and that depresses interest rates. So when your currency policy is weak, the reverse will happen,” Ms Ling explained.

READ: After another cut in Singapore’s GDP forecast, what could happen next? Experts weigh in

Lenders are also waiting for clarity on whether this is the start of a new lengthy easing cycle.

Thus far, Fed chairman Jerome Powell has dispelled hopes of that by describing the rate cut as one to “insure against downside risks”.

Noting that the recent rate cut was done amid strong economic data out of the US, Mr Chia said: “They seem non-committal at the moment as everything hinges on how the trade war develops. The Fed is cutting rates in anticipation of a fallout from the trade war.” 

As banks tend to take a more medium-term view and do not typically react to day-to-day moves in interest rates, Ms Ling said the effect on home loan rates “may be a bit laggard”.

“You’ll probably have to see a sustained period of movements before they will react,” she said. 

WHAT SHOULD HOME OWNERS DO?

Banks were tight-lipped when asked if mortgage rates adjustments were on the cards after the Fed rate cut.

UOB said it reviews its home loan packages to ensure “they remain competitive and to reflect market conditions”.

It added that fixed-rate packages have been preferred by many of its customers in an uncertain interest rate environment.

This as fixed monthly repayments over a certain period within the loan tenor offers borrowers a peace of mind and better control over their finances, said head of secured loans Lim Beng Hua.

Over at DBS, home loan packages are designed to offer “greater flexibility and lower volatility in monthly repayment plans”.

It cited its recently ended “National Day special”, which offered borrowers a fixed rate of 1.89 per cent in the first year. They can either continue at the fixed rate in the second or third years, or switch to a new loan package.

Given the flexibility that it provided, the package was “very well-received, with more than 4 out of 5 customers opting for it”, said head of secured lending Tok Geok Peng.

With the macro uncertainties, Mr Chia advised those shopping around for home loans to do more homework and consider more closely whether a fixed or floating-rate package would work best depending on when they need the mortgage.

For now, however, fixed-rates packages seem to have become a “much more viable option”, he added.

For those with existing mortgages, there could be opportunities to refinance though one will have to consider possible additional costs such as penalty, legal and processing fees.

Mr Chia stressed that while it may be tempting to switch loan packages based on interest rate movements, a housing loan is a long-term commitment.

“There are too many macro risks at the moment and I don’t advise homeowners to speculate on interest rates. It’s like trying to catch a falling knife,” he said.

 “Home loans are for the long term, so affordability is still key.”


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