Between March 2022 and July 2023, the U.S. Federal Reserve (Fed) raised interest rates by a whooping 5% – from 0%-0.25% to 5.25%-5.50%. This caused major disruptions in the financial markets, including on stocks, bonds and treasury bills (T-bills) and even home loan packages.
While interest rates in Singapore were similarly forced upwards, our relatively strong Singapore Dollar (SGD) meant that it rose at a slower pace. Still, home loans soared from a range of about 1.2% to 1.5% up to nearly 3.5% between 2022 and 2023.
For a quick calculation, if we bought a $1.5 million property at the start of 2022 – paying a 25% downpayment and using a 25-year home loan – on a 1.2% interest rate home loan, our monthly repayments would be $2,895.
Buying the same $1 million property at the start of 2024, on a similar home loan package at 3.5% interest rate, would have raised our monthly repayments by almost 30% to $3,755.
How Will Your Home Loan Repayments Be Impacted In A Falling Interest Rate Environment
In September 2024, the Fed finally cut interest rates by 0.5% – setting it at a range of 4.75%-5.25%. More rate cuts are also expected in the coming months.
In the chart below, we can see that SORA rates, which most home loan packages are pegged against, have sharply risen since 2022 – reaching a high of nearly 4.5%.
In the past year, it has stablised slightly above the 3.5% level, but has again experienced some volatility in recent months – likely due to interest rate cuts in the U.S.
Source: Rates retrieved from MAS
All this isn’t a surprise. The Singapore Overnight Rate Average (SORA) is a volume-weighted average rate of unsecured overnight interbank SGD transactions in Singapore, administered by MAS. As global interest rates rose between 2022 and 2023, led by the Fed, so did the SORA.
However, when the U.S. cut interest rates by 0.5% in September 2024, the SORA experienced more volatility, trending upwards instead of downwards. This shows us that a cut in the U.S. rates may not immediately be apparent in the SORA rate.
Read Also: Guide To Understanding How SORA-Pegged Home Mortgage Loans Work
Interest Rates On Home Loans Already Starting To Drop
While the SORA rates might not be falling just yet, home loan packages offered by Singapore banks are already providing more attractive interest rates.
To get a comparison of home loan interest rates offered by over 16 banks and financial institutions in Singapore, we can simply rely on the home loan mortgage comparison tool by Redbrick.
The table below shows that current home loan packages have already come down to about the 2.5% to 3.0% level.
As we can see in the table, these are first-year interest rates. Even when taking up a fixed-term home loan, we can expect most home loan packages to offer a cheaper first year, and expect the fixed rates to rise in the second and third years.
How Home Loan Repayments Will Be Affected If Interest Rates Drop In Singapore
We can reference Redbrick Mortgage Repayment Calculator to look at how our home loan repayments will be affected if interest.
Based on Redbrick’s calculator, if we bought a $1.5 million home (and took the maximum 75% loan) at the peak of home loan interest rates at about 3.5%, we would pay $5,632 a month. While not ideal, it would only be about 1 to 2 years before we can refinance the home loan package.
If we can refinance our home loan today, we may be able to get an attractive rate of about 2.5% p.a. (based on Redbrick’s comparison). This will bring down our monthly instalment by about 10% to $5,047.
For those considering whether to buy a home in the slightly lower interest rate environment, you can also reference the 2 screenshots above to see that when interest rates were at the 3.5%-mark, you need a higher income ($9,387 vs $8,412) to buy a $1.5 million home.
This is because the Total Debt Servicing Ratio (TDSR) framework limits us to use only 60% of our income to repay loans that we take on.
In short, we can afford more expensive homes in a lower interest rate environment. While more interest rate cuts are expected, we can also see in the SORA chart in the earlier segment, that it may not have an immediate impact in Singapore. Nevertheless, with banks offering more attractive rates already, the expectation is that rates will follow a similar downward trajectory.
What Should You Do In A Falling Interest Rate Environment?
It’s hard to press the pause button on life just to wait for interest rates to be at the level we wish for. For those in the market to buy a home, the fixed interest rates currently on offer are fairly reflective of the lower interest rate environment. There’s no harm (or much choice besides opting for the best financial institution) in taking up a home loan right now.
In fact, as discussed earlier, it may also be that we can afford to take a slightly bigger home loan, and buy a slightly more expensive home as interest rates are already lower today.
While going for a fixed-term home loan is generally cheaper, if we strongly believe there will be more aggressive interest rates in the coming months, then taking a floating-rate home loan may serve us better. Or, we could also opt for just a 1-year fixed term rather than locking-in for 2 or 3 years.
While we may be paying more on floating-rate home loans at the start, if interest rates dip sharply, we may be financially better off. However, this may introduce more uncertainty in the amount of our monthly home loan repayments.
For existing homeowners, there typically is not much we can do. If we’re on a fixed rate for the next 1 to 2 years, we’re locked into paying slightly higher interest rates to the bank for the time being. Of course, we will want to kickstart the refinancing process as soon as we can down the line.
If we’re already at the tail-end of our home loan packages though, now could be an ideal time to shop for a good interest rate on our home loan. We can tap on a trusted mortgage broker like Redbrick to check whether refinancing or repricing with the same bank will make more sense for us.
Redbrick also offers a free personal consultation service with their Mortgage Experts to help answer our questions and guide us in choosing the best property loan. All we have to do is fill in their contact form.
Read Also: 4 Ways Singaporeans Might Be Affected By US Federal Reserve’s Interest Rate Cut
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