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Rising interest rate and home loans.

Sunday, May 15, 2022

This blog is in reply to a comment from a reader.

I blogged about home loans before: 

That was about 6 years ago but I think some bits are still worth reading. 

My gut feeling is that mortgage rates will rise faster than the SSB's 10 year average coupon. 

Even the fixed deposit rates are rising rather quickly now as banks have started competing for deposits. 

Banks are trying to lock savers in with higher rates now because they think interest rates will go even higher in future. 

My mom went to renew her fixed deposit a few weeks ago and was pleasantly surprised to be offered 1.1% for 1 year. 

This was because my aunt did her renewal a month before and she was offered 0.8% at the same bank. 

Another bank offered my mom 1.5% per annum but it was a 2 years fixed deposit. 

For a 3 years fixed deposit, they offered her 1.9%. 

That's too long and we are not compensated enough when interest rates are expected to rise rapidly in the next couple of years.

I told my mom to just go with the 1 year fixed deposit because interest rate would probably continue rising rapidly. 

We could soon see 2% interest rate offered for a 1 year fixed deposit.

In fact, it could even go higher if inflation stays stubbornly high and the Fed has no choice but to continue raising interest rate to a point where it is higher than the inflation rate. 

After all, the most effective way of bringing down inflation if past experience is anything to go by is to have interest rate higher than what inflation is and inflation is at about 8% in the USA now. 

We can say that inflation is lower in Singapore but, unfortunately, when it comes to interest rate, Singapore is a price taker because we do not control the interest rate in our country. 

"Most countries, including the United States and China, adopt an interest rate policy where central banks raise or cut interest rates. 

"Singapore is the only major economy in the world to use the exchange rate, guiding the Singdollar higher or lower. 

"MAS says the exchange rate is the best tool for a small, open economy like Singapore" 

Still, no one can be sure what the longer term picture is going to be but in the shorter term, there will be pain and most of us should be prepared to tighten our belts. 

I remember when I paid off my last home loan, my mortgage rate was 5.1%.

Yes, young people might find that rather surreal but it wasn't a bad dream.

It was real.

Interest rates are going higher but no one knows for sure how much higher.

Still, if we are not overleveraged, all else being equal, we should do better than most.


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摇木马的小孩 said...

hi AK!

hope all is well for you. with interest rate rising, will you be looking to invest your OA? such as buying s&p500 using OA thru endowus. with long term invessting horizon, it should yield better than 2.5%.

AK71 said...

Hi 摇木马的小孩,

Good question.

I have blogs on how money in the CPF-OA can be treated as a war chest as well.

However, if we have a relatively big investment portfolio, our CPF savings can be considered the investment grade bond component of our portfolio which will help to reduce volatility in our portfolio.

I will have to carefully consider the option of investing my CPF savings in equities as I am not young anymore.

I might consider investments which offer higher returns than the CPF and which I think are risk free or at least relatively low risk in nature.

This is a pertinent consideration now that the average coupon for 10 year SSB is trending higher than 2.5%.

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