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Interest rate on home loan jumped 15.84%!

Tuesday, February 10, 2015

It was less than a month ago when I shared here in my blog and on my FB wall that because the cost of not paying down my home loan is really quite low, it makes sense to hold off paying down the loan for now. Has this changed?




Unless we do not follow the news, all of us would know that the SIBOR has been rising and in the first "An evening with AK and friends" event, I said that the 3 months SIBOR has risen from 0.3+% to 0.6+% in a matter of weeks. Rusmin Ang from The Fifth Person reminded us that the 3 months SIBOR was, at one time, as high as 3+%.

In a letter from the bank yesterday, I was informed that the interest rate for my home loan has changed from 1.16917% to 1.35435% per annum.

This is a jump of 15.84%!


Oh, the pain!


What does this mean in dollar terms?

If a person has a $500,000 outstanding home loan, he would have about $900 more in interest payment a year. The actual figure would differ depending on the length of the loan, bearing in mind the effect of amortisation.

Now, $900 might not seem like a big deal to some people but it is quite a bit of money to me.


For people who have been complacent and who have been upgrading their lifestyles as their income was upgraded, if they had upgraded to the most expensive property they could afford (for their own consumption) in the last few years, I think receiving a letter like this should be a wake up call for them. They should not just file and forget. Why?


These are people who could possibly have stretched their finances to the max especially if they had rushed to buy before the implementation of the TDSR.

What would I do if I were in their shoes?

I would try to anticipate a much higher interest rate in the next two years and take action. If we believe what CIMB's regional economist, Song Seng Wun, said recently (and I think we would do well to believe him), we should be prepared for the 3 month SIBOR to hit 1% by end of the year and 2% by end of 2016.

For a $500,000 home loan, it would mean an additional financial burden of some $2,900 and $7,900 a year this year and next year, respectively, ignoring the effect of amortisation. $900 more a year in interest expense, people might shrug it off but what about $2,900 to $7,900 more a year? Do I see cold sweat?

What about those who had stretched themselves to the max and had taken a $1 million or $1.2 million home loan, bearing in mind that homes priced at $1.5m and below were more popular amongst upgraders in recent years? How much more would the interest expense be in dollar terms?

I shudder at the thought.




On 17 Jan, I said:

Now, my home loan has an interest rate of about 1.3%. A bit lesser than that, probably, even with the recently higher SIBOR. I think that makes it rather inexpensive and it probably makes sense to hold off paying down the loan for now.

I have put aside enough cash to pay off the loan but it could possibly be used for investment opportunities if there should be a stock market crash. Of course, if interest rates were to shoot through the roof, I would use the cash to pay off the loan.


While waiting, I leave my money in CIMB to receive an interest of 0.8% per annum and some FDs that pay 1.1% to 1.25% per annum. So, effectively, the cost of not paying down my home loan is not that high.

So, I am prepared for an eventually higher interest rate. Am I in the minority? I don't know.



Of course, some might say that we could refinance (if the option is available) and opt for fixed interest rate packages.

However, we have to remember that fixed interest rates are usually for a period of a few years (typically 3) and not for life. It might also be higher than the interest rate of our current home loan in the short term.

Finally, there is usually no option for partial capital repayment for fixed interest rate packages.

Refinancing could be an option for some but we should take a hard look at our finances and see whether there are ways of improving our savings rate either by increasing income or reducing expenses or both in order to cope with the much higher interest expense that is bound to hit us in the very near future.

Increasing our savings rate would also give us the option of paying down our home loans. Yes, partial capital repayments should be seriously considered if interest rates become much higher.

So, if we should have an outstanding home loan of $500,000 and if interest expense is estimated to increase by $7,900 a year by end of 2016, we should be thinking of putting aside (at least) an extra $658 every month now. Get ready now and we won't be caught unprepared when the time comes.


What is at the tip of the pyramid?


Believing that our jobs are forever secure and that we will get salary increments year after year to cope with higher costs are beliefs that come close to being speculative (for most of us).

If we believe that we must not put too much weight on our more speculative positions in our investment portfolio, then, what about the weight we should put on these beliefs?


In summary:

1. Higher interest rates are upon us.
2. Higher interest rates will go higher.

3. High time we take action if we have not done so.

Although highly unlikely, I hope I have succeeded in ending this blog post on a high note.

Related post:
Buy the biggest and most expensive home?

Update (10 Oct 15):
"DBS says it expects the three-month Singapore Interbank Offered Rate to rise from the current 1.13 per cent to 1.22 per cent by the end of this year, and 1.75 per cent in about a year's time."
Source: http://www.channelnewsasia.com/news/singapore/home-owners-should/2180930.html

39 comments:

An Koh said...

Hi Ak, my view is home loan is for the long term and we need to have that approach as well. The current trend of many colleagues and friends rushing to fix home loans for 2 or even 3 years is worrying even though as it means potentially cheaper payments for next 24/36 months.

The downside is after that fixed rate ends, and if interest rate remains high, the spread that banks will require will also go up. So there's a calculated risk here, and I will rather continue on my current package where the spread is lower (0.X% plus sor/sibor combi).

And if interest rates really rockets, then l will try to pay up as much in cash as possible which my current loan allows which fix rates loan do not.

Am I wrong?

One of your silent readers turning vocal,
An Koh

AK71 said...

Hi An,

Your philosophy and your plan resonate with mine. :)

In particular, I want to say that I definitely agree that although a home loan is a longer term commitment, to be prepared to more rapidly pay down the loan is wise for obvious reasons.

Thanks for breaking your silence and I look forward to many more comments from you in future. :)

RetailTrader said...

A timely post AK, as I have friends who are highly leveraged and are not in a position to sell of their property holdings easily due to seller's stamp duty. It's squeaky bump time for some folks in the property market!

Lim Der Shing said...

Ak, nice article. Am wondering how you would view this situation. Say one has a 1m mortgage sgd loan now charging at 1.35% and one also has another loan at 1m charging 0.9% but revolving monthly. This loan is used to own sgd bonds somewhat.

Would you bother to borrow another 1m sgd revolving to pay off the housing mortgage just for the interest savings of 0.45% or 4500. But the risk is that now you owe 2m sgd to the bank and your leverage ratio worsens. In other words do you believe in the matching loans to the assets loaned against?

apex property investment said...

Hi AK, don't sensationalise la, its 0.3% increase not 15.84% increase.. you are scaring me.

AK71 said...

Hi RetailTrader,

Squeaky bum time for some folks, indeed. -.-"

The situation of oversupply in the real estate market in Singapore has yet to run its full course. I suspect that things will get a lot worse before they get better. -.-"

AK71 said...

Hi Der Shing,

I think the example you have given does not apply to most Singaporeans. We probably have to be some private banking client to have access to credit at only 0.9% interest per annum. Well, at least I don't have such a privilege. ;p

I wouldn't use a revolving loan to pay off my home loan for a very simple reason. A revolving loan is recallable on demand. I won't be able to sleep well at night knowing this. Just to save a little bit of interest payment, it is not worth it. -.-"

AK71 said...

Hi Apex,

Oh, I assure you that the numbers are quite accurate.

1.35435% is a 15.84% increase over 1.16917%.

It is a matter of proportion, always. ;)

Kyran Tan said...

Hi AK, I finally bought my first property with my fiancée in Aug last year. Just to share my own considerations when we decided to go ahead:

1) Age (we are both in our mid thirties so no longer young)
2) Cash flow (can we pay another 20% cash if circumstances turn awry and we need to top up?)
3) Can we ride thru a situation should interest rate spike to as high as 4%
4) options of housing near mrt and to her parents' place
5) Job stability

So it was a mixture of both financial and family planning needs in my case. I guess for those who are still young in their twenties then time is on their side to consider heavily more on the financial aspect.

AK71 said...

Hi Kyran,

Hey, long time no hear. Thanks for sharing with us your thoughts on the matter. :)

Although buying a residential property last year might suggest that it was bought at the peak or as prices are declining from the peak, all of us have our own unique considerations when making a purchase. :)

Of course, it could have been a BTO flat or an EC which would have some built in margin of safety or it could have been an unloved value buy (which I love). ;)

In the purchase consideration, it is important to consider the future financial burden of servicing the loan in an environment of rising interest rates. I feel that you have been prudent to consider a more normalised 4% interest rate on home loans. This could happen by 2017 or 2018.

Finally, mid 30s still young lah. Really. :)

Lim Der Shing said...

AK, agree. Makes good sense to match loans to assets, I wonder how many pb clients realize this.

Nick said...

Nice article AK.

If housing loan interest rates continue to raise and crosses the CPF rate of 2.5% would you consider using the surplus amount in your OA to partially pay off the loan?

Kyran Tan said...

Haha I prefer to be a silent reader. If nothing of value to contribute I prefer to keep my 'fingers' shut.
Anyway I bought a private condo and I like the fact that it is the last unit in the block on the top floor so it's partially a gut feel. Ok emotional decision usually not so good when it comes to $ I know ;p

AK71 said...

Hi Der Shing,

It is too easy to be lulled into a sense of security when times are good. -.-"

Seeing how much money UHNW individuals have lost buying luxury properties in Singapore like the St. Regis, Sentosa Cove and some in the Cairnhill area has told me that even smart money might not be smart at times.

So, how many of your fellow PB clients realise what you have realised? I don't know but I am willing to bet that not all know what you know. :)

AK71 said...

Hi Nick,

Let me try to answer your question by going off tangent. ;)

It depends on the cost of holding on to liquidity. Right now, I get paid 0.8% interest for money in a savings account and 1.1% to 1.25% for money in some fixed deposit accounts.

My home loan currently attracts an interest rate of about 1.4%. So, the cost of holding on to liquidity is 0.15% to 0.6% per annum. This is still relatively inexpensive.

Holding on to liquidity allows me to seize good investment opportunities if they should present themselves but the cost should not be too high.

What is too high? When I paid off my last home loan many years ago, the interest rate was 5.1% which was way higher than interest paid on fixed deposits in those days. The highest FD interest I remember was maybe 1.5% for 12 months. Of course, the CPF-OA paid 2.5% per annum.

So, it made sense for me to pay down the loan ASAP because it was tantamount to "making" 2.6% to 3.6% per annum by paying down the loan, risk free.

AK71 said...

Hi Kyran,

Oh, you bought a penthouse! Nice lifestyle! :D

Well, it is a home and most people do get a bit more emotional when it comes to properties for our own consumption. Strangely, I have never had any emotional attachments to my homes. I am also not one to spend too much on renovation. Maybe, there is something wrong with me. -.-"

Anyway, since you have crunched your numbers and are comfortable with the purchase, you should enjoy the property with peace of mind. Congratulations! :)

Ana said...

Hi,
You are still young! Trust me. :)

Kyran Tan said...

Hi AK, oh yea it would have been a 'penthouse' at maybe 2008 price? Haha. No my appetite not so big. It's a 3 bedder with balconies. Lifestyle living, yes maybe loosely speaking ;p I guess I am just sold on the idea of having a balcony on a high floor similar to where I am staying now. Easier to adapt to a new place maybe. Most importantly my fiancée agrees to the place so our stars are 'aligned'

AK71 said...

Hi Kyran,

That is the most important thing in a marriage: husband and wife both agree! Strong Buy! LOL!

Well, there are still penthouses available in RCR for about $1,200 psf. Not super duper cheap but I see more properties being more realistically priced now. Of course, they could get even cheaper in the next 2 years. ;)

Kyran Tan said...

Aiyo mine is OCR and at around $1k psf, definitely not cheap.

I really hope for once your crystal ball remains a 'bowling ball' on the getting cheaper bit ;p

AK71 said...

Hi Kyran,

$1,000 psf in OCR? I think it is the norm now but I think you know that, this time, my bowling ball might actually know something that you and I both know. -.-"

Don't think too much. Just make sure that we are prepared for the storm that is to come. :)

Siew Mun said...

I am still staying at 1680 sq ft hudc turned private condo bought 10 years ago at $480K about 300 meters away from mrt station. I recently re-finance my mortage of about $198K fixed interest for 2 years to anticipate the rise in SIBOR.

AK71 said...

Hi Siew Mun,

I would love to be in your shoes. If I were in your shoes, I would definitely sleep very well at night. ;)

Kyran Tan said...

Amazing value. $480k nowadays probably won't even get u a 4 room resale flat in decent locations near mrt!

AK, when a storm arrives, I will make sure I get my remaining bullets ready for the stock market. It's ok to lose in life as long as it's not everything ;p

AK71 said...

Hi Kyran,

What is considered near? For younger folks, a 10 to 15 minutes walk is probably near enough. For older folks, they might want to stay within a 100 meters walk. ;p

I think that staying near MRT stations have utility and disutility especially if they are the above ground type. Generally, however, for investment properties, being closer to MRT stations is a plus (at the right price).

I get the feeling that you must be building up your recession ammunition now. Definitely a good thing to do. ;)

Kyran Tan said...

Morning AK, I think the word 'near' is indeed relative to age group and level of 'laziness' haha. For mine, it's right across the road and is an underground station so no worries about noise.

I have not abandoned my monthly investment plan, just not putting in everything. I am just prepared to double the investment amount if things get worse. Maybe i don't get to 'win' in property, but I sure hope I don't lose in stock market. That would be disastrous for anyone.

AK71 said...

Hi Kyran,

Haha... All of us have different considerations. As long as a property makes sense to us, it is good for us. It is home. ;)

Well, I think you will win in property. It might be dangerous for me to say this but in the very long term, real estate here in Singapore is more likely to appreciate although in the shorter term, prices which ran ahead of fundamentals will soften.

Kyran Tan said...

Hi AK, I shall continue to enjoy 'free housing' until the new house is ready. I am lucky that we have parents who have rooms to accomodate us till that day haha. Thanks for the 'long term consolation'. This I hope your bowling ball comes in pure Crystal ;p

AK71 said...

Hi Kyran,

Oh, I paid rent actually while I was waiting for my current place to be ready. Very worth it because food and laundry services also provided, not just lodging. Haha... ;p

Kyran Tan said...

Oh lucky u too. Maybe I did in retrospective ;p

AK71 said...

The 3-month Sibor or Singapore interbank offered rate jumped to 0.836 per cent on Monday from last Friday on continued US dollar strength.

At Monday's level, the 3-month Sibor which is used to price home loans is up almost 3 per cent from last Friday, and 115 per cent higher from the 2014 low of 0.389 per cent.

The US dollar continued to rally on stronger jobs growth data out last Friday. Year-to-date, at S$1.3797, the greenback is up 4.09 per cent against the SGD.


Source:
http://www.businesstimes.com.sg/government-economy/sibor-jumps-to-0836-on-us-strength

AK71 said...

The SIBOR is rising faster than expected and could really surprise us before the end of the year. If you have a home loan that is of a rather big quantum, like I shared in an earlier blog, making sure that your finances would be able to absorb the higher monthly repayments is the prudent thing to do.

Those who stretched their finances before the introduction of the TDSR cooling measure was implemented in order to buy their dream home (taking advantage of the very low interest rates) but didn't know they were over-leveraging might be in for a hard time as interest rates are more likely to continue rising through 2016. Taking pre-emptive measures, bulking up the family's emergency fund, for example, is what they should be doing.

AK71 said...

Homeowners servicing mortgages will need to tighten their purse strings further: The three-month Singapore interbank offered rate (SIBOR) on Wednesday (Mar 11) charged past 0.9 per cent — a level not seen since 2008 — amid widespread expectations that the United States Federal Reserve will raise benchmark borrowing costs by mid-year.

Source:
http://www.channelnewsasia.com/news/singapore/homeowners-hit-as-sibor/1712688.html

AK71 said...

The Monetary Authority of Singapore’s (MAS) surprise move in January to ease policy ahead of its scheduled April meeting had given rise to greater expectations of a weakening local currency, analysts said.

“I think there is rising expectations for the exchange rate to depreciate, not necessarily against the US dollar but also against the basket of currencies that the Singapore dollar is weighed against. That will put some upward pressure on interest rates,” said Credit Suisse economist Michael Wan.

“What this means is mortgage rates will rise, so households that have over-leveraged over the past years will be hit quite a bit and there may be some downward pressure on consumption spending. If domestic demand disappoints, it leaves more of the burden on external demand, or global growth, to drive the economy,” he added.

The recent rise in domestic interest rates have led to some economists re-looking their exchange rate projections for the year, but they said MAS’ policy decision come April will very much determine how things will pan out.

UOB’s Mr Tan said another easing by the central bank could push the US dollar to S$1.44, which will see the three-month SIBOR ending the year at around 1.3 per cent, up from his previous forecast of 1 per cent.

AK71 said...

A key benchmark lending rate rose above the 1 per cent level for the first time in more than six years, indicating that mortgage rates will increase further in coming weeks.

The three-month Singapore interbank offered rate (SIBOR) was fixed at 1.00129 per cent on Tuesday (March 24), according to Association of Banks in Singapore (ABS) data posted on Bloomberg, up 0.9 per cent from Monday's fixing of 0.99216 per cent. The rate has been climbing steadily since end-December when it stood at around 0.45 per cent.


Source:
http://www.channelnewsasia.com/news/business/singapore/sibor-rises-above-1-in/1737558.html

AK71 said...

Fed officials have long viewed the energy-driven weakness in inflation as transitory. Economists said February's firmer inflation readings did little to shift the debate on the timing of the first interest rate hike.

While a June move remains on the cards, many economists are leaning towards a September tightening, arguing that policymakers will need to be confident about inflation rising towards the central bank's 2 percent target.

Economists expect both the effects of a strong dollar and weak energy prices to influence the inflation data through the first half of the year.

Fed Chair Janet Yellen said last week policymakers could raise interest rates when they had "seen further improvement in the labor market" and were "reasonably confident that inflation will move back to its 2 percent objective over the medium term."


Source:
http://www.channelnewsasia.com/news/business/international/us-consumer-prices-reboun/1738664.html

AK71 said...

Market analysts have said mortgage rates are expected to climb further in the coming months and more home owners are reviewing their financial position.

Mortgage rates for home owners on floating rate loan packages are estimated to have risen on average from about 1.5 per cent a month ago, to 2 per cent now, according to mortgage broker FindAHomeLoan. This comes amid a steady increase in the Singapore Interbank Offered Rate (SIBOR).

The benchmark lending rate was at 1.00529 per cent on Wednesday (Mar 25). This is more than double the figure at end-December, when it was around 0.45 per cent. According to market watchers, it could rise further to about 1.5 per cent this year.


Source:
http://www.channelnewsasia.com/news/business/singapore/mortgage-rates-expected/1741846.html

AK71 said...

Ms Yellen told members of the House Financial Services Committee on Wednesday that the Fed is likely to raise the benchmark interest rate for the first time in almost a decade, assuming its forecasts for stronger growth and lower unemployment are realized. The probability that the increase will come as soon as September helped boost mortgage rates, said Keith Gumbinger, vice president of loan-research site HSH.com.

"Markets are preparing themselves for that eventuality, and that makes it harder for rates to fall," he said.


Source:
http://www.businesstimes.com.sg//real-estate/us-mortgage-rates-increase-with-30-year-at-a-nine-month-high

AK71 said...

Just 6 months ago, for me, it was 1.35435% in February. It has surpassed 2% for the first time this month.


At the beginning of 2015, home buyers in Singapore could get loans that start at 1.6 per cent in the first year. That rate has been creeping up, and the figure is now around 2 per cent, for rates pegged to three-month Singapore Interbank Offered Rate (SIBOR).

DBS said it expects SIBOR to rise from the current 1.13 per cent to 1.22 per cent by the end of this year, and 1.75 per cent in about a year's time.

Should mortgages increase by the same amount, a family with an outstanding S$500,000 mortgage spread over 20 years will have to pay an additional S$137.71 a month to service the loan.

Assuming variable interest rate rises from the current 2 per cent now to 2.6 per cent next year, the monthly instalment will rise from S$2,529.42 to S$2,667.13, using DBS's online mortgage calculator.


Source:
http://www.channelnewsasia.com/news/singapore/home-owners-should/2180930.html

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