News broke about local banks raising mortgage rates. This should not come as a surprise as interest rates have been rising for months.
DBS raised both 2-year and 3-year fixed rates to 2.75% and scrapped its loan package for HDB buyers at 2.05%.
OCBC 2-year fixed rate is at 2.65% while UOB is at 2.98%. UOB 3-year fixed rate is as high as 3.o8%.
Here is a quick table to show the rates at the time of writing:
| Fixed Rate | |
| DBS | 2-year: 2.75% 3-year: 2.75% |
| OCBC | 2-year: 2.65% |
| UOB | 2-year: 2.98% 3-year: 3.08% |
Will the mortgage rates go higher? It is very likely.
Singapore mortgage rates are moving towards benchmarking against Singapore Overnight Rate Average (SORA) instead of Singapore Interbank Offered Rates (SIBOR) or Swap Offer Rate (SOR).
We will be using the 3-month SORA for comparisons.
I got the historical 3-month SORA values from Monetary Authority of Singapore (MAS) and plotted the chart below. I identified the peak SORA in 2006 and 2018.
Singapore’s inflation rates in 2006 and 2018 were 0.96% and 0.44% respectively while US experienced 3.23% and 2.44% inflation rates in 2006 and 2018 respectively.
Today in 2022, Singapore and US are forecasting inflation rates of 4.9% and 6.8%!
The SORA is likely to rise and even surpass the 3.346% in 2006, should inflation remain stubbornly high. That means that SORA could possibly rise by 4 times from the current levels!
Here’s a quick table for comparison:
| Peak 3-Month SORA Rate | Singapore Inflation Rate | US Inflation Rate | |
| 2006 | 3.35% | 0.96% | 3.23% |
| 2018 | 1.75% | 0.44% | 2.44% |
| 2022 | 0.78% (30 Jun 2022) | 4.9% (projected) | 6.8% (projected) |
But SORA is not just the rates you pay. The bank will levy a margin on top of it. The margin is higher for fixed rates and lower for the floating ones. This is logical as interest rates are expected to rise and banks have to protect themselves when offering fixed rates.
Of course the fixed rates wouldn’t last forever and the current practice is that the rates are fixed at 2 or 3 years. Thereafter it will vary again. Even if one chooses to refinance the loan, the mortgage rates could be higher should SORA rises.
The margin for fixed rate packages is about 2% currently – I estimated it by deducting the SORA of 0.757% from DBS’s 2.75% mortgage rate.
If SORA soars to 1.75%, the mortgage rates may go to 3.75%.
And if SORA goes to 3.35%, the mortgage rates could be 5.35%.
Let’s discuss the implications.
How increasing mortgage rates affects Home Owners?
Rising mortgage rates would mean increased mortgage repayment per month.
Assuming a person borrowed $800,000 for 20 years. At the current 2.75% mortgage rate, this means he has to repay S$4,337 per month.
If the mortgage rate is at 3.75%, his monthly repayment rises to $4,743 or $406 higher.
If the mortgage rate goes up to 5.35%, his monthly repayment rises to $5,436 or $1,099 higher.
Coupled with inflation which is causing daily expenses to go up, financial stresses can build up if one does not have enough buffer to cater to increasing expenses.
How increasing mortgage rates affects Landlords and Investors?
The next obvious group would be the landlords and investors.
Singapore’s private residential property prices have gone up by about 3% per year in the last 10 years.
If a landlord rents the property for a 2.5% yield, the total margin is around 5.5%.
If overall mortgage rate rises to a rate near 5.5%, property investments may no longer make sense as the interest would eat up returns over time and leave no profits to the investor.
This is one of the reasons why rental rates are going up. Landlords have to cover their rising mortgage cost by passing as much as they can to the tenants.
And we haven’t consider the additional buyer stamp duties when one purchases a new property or the maintenance costs.
I believe that many Singapore properties would become unprofitable investments if mortgage rates go beyond 5%.
How increasing mortgage rates affects HDB loan borrowers?
Another significance is that the fixed rate loans are now higher than 2.6%, which is the HDB loan interest rate.
In the past, HDB homeowners had the dilemma of choosing between cheaper bank loans at a rate of below 2% vis-a-vis the more stable HDB loan at 2.6%. I believe more HDB homeowners will now choose HDB loan over a bank loan.
That said, you have to note that the HDB loan rate is pegged at an additional 0.1% above the CPF Ordinary Account interest rate since 1986. This means that the HDB loan interest rate can go up if CPF interest goes up.
CPF Ordinary Account interest rate has remained unchanged since 1999 at 2.5%. It may change although I think it is unlikely.
While interest rates has been very low for many years, CPF has maintained the interest rate at 2.5%, allowing members to grow their nest eggs more meaningfully. Retirement planning requires stability in the interest rate. Fluctuations hurt. So I believe CPF would want to maintain the same interest rate as much as possible.
I believe CPF rates would only change if the overall interest rate gone up significantly and over a long period of time (years). Otherwise it should remain stable.
Conclusion
The Singapore property market is still seeing demand even at current interest rate. I believe property buying will continue but likely to slow down significantly if mortgage rates go beyond 5%. At that point, many property investments wouldn’t be profitable.
There will still be transactions though these transactions would be by genuine home buyers who need a roof over their heads.
This rising interest rate is a seismic activity for the property market and we are just starting to see the impact. Now is not a time to be gung ho unless you have a very deep pocket.
