Yesterday 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 all fixed rate packages to 2.75% and scrapped its loan package for HDB buyers at 2.05%.
OCBC fixed (2y) is at 2.65% while UOB is at 2.98%.
What is significant is that the fixed rate loans are now more than 2.6%; ie more than the HDB loan interest rate.
In the past, HDB homeowners had the dilemma of choosing between cheaper bank loans at 1+% rate vis-a-vis the more stable HDB loan at 2.6%. The choice is an easy one now.
Will the mortgage rates go higher? It is very likely.
The latest 3m Singapore Overnight Rate Average (SORA) is at 0.7572% and it is still lower than the high points of 1.748% in 2018 and 3.346% in 2006. Hitting these levels are possible given that interest rates are expected to rise further.
The bank margin on the fixed rate packages is about 2% currently (2.75% – 0.7572% SORA). 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%.
There are a few implications.
First, the existing home owners. Assuming a person borrowed $800,000 for 20 years. The current 2.75% mortgage rate means he has to repay S$4,337 per month.
If the mortgage rate is at 3.75%, the monthly repayment rises to $4,743 or $406 higher.
If the mortgage rate is at 5.35%, the monthly repayment rises to $5,436 or $1,099 higher.
Coupled with inflation causing daily expenses to go up, financial stresses can build up if one does not have enough buffer catering to these increases.
Second, the landlords and investors.
Singapore’s private residential property prices have gone up about 3% per year in the last 10 years.
And if the landlord rents the property for 2.5% yield, the margin that he gets to play with is around 5.5%.
If the overall mortgage rate nears 5.5%, property investments may no longer make sense as the interest would eat up the margins 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 it down to the tenants as much as they could.
And we haven’t consider the additional buyer stamp duties when one purchases a new property.
I think property buying will continue currently but likely to slow down significantly if mortgage rates go beyond 5%.
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.
