Impact Interest Rate Cuts Home Loans Good Time Refinance
According to U.S. Federal Reserve chair Jerome Powell, it is time to begin reducing interest rates, sparking speculation of a rate cut at the next Federal Open Market Committee meeting in September. However, the extent of the first rate cut and future trajectory remain uncertain, says UOB’s head of group personal financial services, Jacquelyn Tan. Historically, interest rates in Singapore have followed those in the U.S., says Clive Chng, associate director at Redbrick Mortgage Advisory. This means that when U.S. rates rise or fall, Singapore’s rates and mortgage rates tend to follow suit.
In anticipation of U.S. rate cuts, interest rates in Singapore have already been declining in recent months, notes Chua Hak Bin, regional co-head of macro-research at Maybank Investment Banking Group. He predicts that mortgage rates will continue to decrease as the Federal Reserve eases monetary policy and lowers interest rates. In fact, fixed-rate mortgage packages are now available at nearly 3%.
The benchmark for floating mortgages in Singapore, the Singapore Overnight Rate Average (Sora), has also dropped, falling from 3.701% at the start of the year to 3.572% as of Aug 28. According to Maybank’s Chua, Sora may reach 3.4% by the end of the year, with a cumulative Fed rate cut of 50 basis points (bps) by 2024. He predicts that Sora may decline to 2.7% by 2025.
Taking advantage of lower interest rates
Chua advises homeowners to capitalize on the lower interest rates by refinancing their existing mortgages. However, he warns that some homeowners with a mortgage pegged to the Singapore Interbank Offered Rate (Sibor), which will be discontinued after Dec 31, may experience a “sticker shock” due to Sora typically being higher than Sibor. As such, homeowners should review and consider more attractive mortgage deals to benefit from the lower financing rates.
For buyers with outstanding mortgage loans, it may be beneficial to remain flexible and avoid locking themselves into a loan package, particularly as interest rates are expected to decline. It may be wise to opt for a variable rate package with a one-year lock-in instead. The lower mortgage rate also affects the loan amount that a homebuyer can qualify for, with most banks using Sora + 1% as the interest rate in a stress test. If interest rates decrease by 50 bps, buyers with a combined monthly income of $16,000 and a 30-year loan tenure can borrow up to $1.8 million, compared to $1.7 million previously.
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To reprice or refinance?
Some homeowners may choose to reprice or switch to a new loan package with the same bank, but they may incur repricing fees. Others may opt to refinance by switching to another bank offering a more favorable home package. Refinancing allows homeowners to optimize their mortgage terms, potentially lower interest rates, and enjoy lower monthly installments, says UOB’s Tan. However, there may be additional costs involved, such as legal fees, valuation fees, prepayment penalties, or clawback of subsidies, so homeowners should carefully calculate if the total additional costs outweigh the potential savings from refinancing.
Fixed-rate loans are more attractively priced
Over the past year, banks have generally offered more attractive pricing for fixed-rate loans compared to Sora-pegged loans, according to Tan. This trend is expected to continue into 2025, and OCBC currently offers one-, two-, and three-year fixed-rate mortgage packages, as well as floating rate packages pegged to the three-month Sora. The two-year fixed-rate package remains the most popular, and it is currently priced approximately 0.35% lower than a year ago, says Maryanne Phua, head of home loans at OCBC. Redbrick Mortgage Associate Director Clive Chng reports that some banks are offering free conversion between fixed and floating rates, or a one-year fixed interest rate with a two-year lock-in period, allowing homeowners to switch to a variable interest rate package in the second year. In a competitive loan environment, banks may even offer fully subsidized valuation and legal fees for those looking to refinance, adds Huttons Asia Senior Director of Research and Data Analytics Lee Sze Teck.
Interest rates in Singapore may not see a significant decrease unless there is a recession, predicts Chng. Since the country has adopted an “appreciation stance” on its monetary policy to prevent inflationary pressures, Tan does not expect domestic interest rates to decline in line with those in the U.S.