Interest rate on home loan jumped 15.84%!

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