Facing up to high mortgage rates

“Have you fixed your mortgage yet?”

Chances are, you would have heard this question making its rounds at dinner conversations these days. (Anything fixed below 2% is a cause for celebration.) The fervour comes as home loan rates in Singapore had spiked dramatically in 2022, in line with aggressive Fed rate hikes in the US. As of July 2023, while mortgage rates here have generally come down from 2022's record levels, they are largely expected to remain high at least in the near term.

Such rate hikes by central banks such as the Fed are done to cool red-hot inflation, which has proven stickier than initially expected. By raising interest rates, central banks are effectively making it more expensive for consumers (and businesses) to borrow money. This can curb demand, which in turn brings prices down. 

But by pulling back growth, central bank moves can trigger an economic contraction — in other words, a recession if this occurs for two straight quarters. This is the economic climate that consumers are working with today: a higher debt burden, higher inflation, and higher risks of stagnating wages and job losses when business slows.

Goodbye, sub-1% mortgages

The latest advertised fixed mortgage rates from banks in Singapore (as of end-July 2023) are mostly around 3.65% to 3.75% per annum (p.a.) for the first two years — the typical lock-up period when signing on a mortgage package.

That pales against the sub-1% floating rates that some banks were offering in 2020. The world was in a different place then: central banks around the world reduced rates to secure continued liquidity in the financial system to prevent an economic collapse from a global pandemic. 

The dynamic environment today can leave us all a little lost and anxious. But there are ways to ease some of these concerns. 

With the dramatic shift to sharply higher borrowing costs in focus today, let’s look at some options to manage your mortgage payments in this rising rate environment.

If it suits, consider locking in fixed mortgage rates

Debt has been cheap for decades now, and consumers who took mortgages on floating rates particularly capitalised on the low rates. Using floating rates means that your mortgage fluctuates according to the benchmark rate. 

Older mortgages using the floating rate tend to be priced on the 3-month Singapore Interbank Offer Rate (Sibor). (Note: Because Sibor will be replaced by the Singapore Overnight Rate Average (Sora) by 2024, newer mortgage packages tend to be priced on Sora.)

Banks can also offer floating rates based on board rates, essentially rates that are determined at the discretion of the lender. 

Now, as the chart shows, Sibor has jumped dramatically in 2022, crossing 4.25% in December. While it has come down slightly this year, Sibor still stood at more than 4% as of June 2023, a far cry from a mere 0.4375% at the start of 2022.

Most consumers today will choose to lock in fixed rates, be in with a new loan or via a refinancing deal. 

As of June 2022, fixed rates stood at around 2.6% to 2.75% for 2-year home loan packages. That was then. On 1 Aug 2023, The Straits Times reported that fixed home loan rates in Singapore are around 3.65% to 3.75%.

To be clear, because each new batch of fixed-rate mortgage packages rolled out by the banks accounts for potentially rising rates ahead, you would typically be paying more on fixed-rate loans compared to current floating rates, in exchange for stability.

The difference is that this is a period of uncertainty on the interest rate path, so there is reason to value stability in our mortgage payment more in today's context, compared with the situation of low rates just a few years ago. While economists in Singapore generally believe that rates are nearing a plateau (as of July 2023), the consensus remains that central banks are unlikely to cut interest rates anytime soon. That means interest rates could very well stay high in the near term.

Still, as with all financial decisions, each individual should weigh his or her needs and considerations — for example, if you are planning to sell an apartment unit in six months, refinancing your mortgage now would likely put you on the hook for a prepayment penalty when you pay off the loan with the sales proceeds.

Some lenders are offering hybrid options, packaging with a fixed rate for the lock-in period of two years, and floating rates from the third year onwards. Banks typically offer a one-time free change in interest rate packages at the end of the lock-in period. 

After signing the mortgage, set a calendar for your mortgage review two years from the latest rate review date. Because of the volatile economic climate over the next two years, it pays to be monitoring the rates carefully, so you can review your package in a timely manner when the lock-in period is up.

Property cooling measures

There are also property cooling measures to note. For instance, in April 2023, the Singapore government announced new measures — the third round since December 2023 — which included the doubling of the additional buyer's stamp duty (ABSD) for foreigners to 60%.

Prior to that, on 30 Sept 2022, new property cooling measures included tighter maximum loan quantum limits for housing loans to ensure prudent borrowing and avoid future difficulties in servicing home loans. This involved lowering the loan-to-value (LTV) limit for HDB housing loans from 85% to 80%. In other words, the amount that HDB will lend to flat buyers will be no more than 80% of the price of the property.

The tightened LTV limit applies to new flat applications for sales exercises launched and complete resale applications that are received by HDB on or after 30 Sept 2022.

HDB’s concessionary interest rate of 2.6% p.a. is unchanged.

But for new applications for an HDB Loan Eligibility starting 30 Sept 2022, it will introduce an interest rate floor of 3% p.a. to calculate the eligible loan amount.

The Monetary Authority of Singapore (MAS) has also raised by 0.5%-point the medium-term interest rate floor used by private financial institutions to compute a borrower’s TDSR and MSR.

The regulator said the move reflects higher interest rates expected over the medium term, compared to the period of exceptionally low rates from 2013 to 2021.

Weigh pros and cons of mortgage repayment, CPF VHR

Given the rising mortgage rates, some may wonder if they should repay early. Do the sums of paying the penalty of early repayment, and decide whether you have enough liquidity to cover your daily costs and any emergency expenses that may crop up.

You can also consider using cash to voluntarily refund the amount taken from your CPF OA to pay for your property. The refunded amount earns 2.5% interest. Between 2019 and 2020, the total refunded amount via the CPF Voluntary Housing Refund (VHR) scheme roughly tripled to nearly $1.5 billion.

You can learn more about VHR in our special podcast episode with The Financial Coconut.

Be Cash Smart

A mortgage is a long-term commitment, with the monthly payment stretched across decades. Once you figure out how much more you are paying in your new mortgage bill, find a way to ensure that your existing cash is being worked harder to make up for the higher expense.

One way to instil discipline is to ensure that for every $1 that goes into paying your mortgage, another $1 is put to the investing grind. 

If relevant to you, you may consider cash management products, though it should be clearly noted that these are not capital-guaranteed. For example, the yields of Endowus’ Cash Smart Secure have been rising and the Endowus platform allows investors to redeem their funds from their cash management portfolios at no additional cost. For investors who want flexibility, having no lock-in restrictions is a perk.

To find out more about the latest yields of cash management funds and portfolios available on Endowus, click here.

Financial planning for the long term

Of course, while the mortgage burden hits us monthly, the reality is that it is a major long-term debt commitment and comes alongside other big-ticket expenses in life that are becoming more expensive. 

Taken in totality, it is worthwhile looking at how you are investing beyond low-risk cash management products that do not beat inflation rates. 

Investors should look at their long-term commitments at hand, and can consider putting money into investment-grade bonds that are also rising in yields, or in global stocks that have hit new lows in 2022. Endowus has a whole suite of portfolios — ranging from advised Income Portfolios and Flagship Portfolios, to tactical options provided on our Fund Smart platform — curated for investors to make their cash savings work harder for a more comfortable future. 

With digital wealth platform Endowus, you can plan and manage your money — whether held in cash, CPF or SRS — by investing in globally diversified, intelligent, low-cost portfolios seamlessly. To get started, click here.

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