The Federal Reserve on Wednesday increased interest rates for the first time since 2018 and laid out an aggressive plan to push borrowing costs to restrictive levels in the coming year, a pivot from battling the coronavirus pandemic to countering the risks of excessive inflation and the war in Ukraine.
The U.S. central bank’s Federal Open Market Committee has announced that it will officially begin the process of increasing interest rates! The decision comes after a quarter- percentage-point hike in the federal funds rate. This is a significant step towards increasing underlying interest rates on consumers and businesses.
How Interest Rates Moved Back In 2018
It was widely anticipated that rates would go up in 2018, and similarly, we get the sense that the rate hikes have already been baked into the market back then. For the first half of the 2018, 2-year fixed interest rates inched up only about 10bps to 1.75%, and 3-year fixed rates moved up by 5 – 10bps to 1.85% – 1.90%; not really very drastic changes. We focus on fixed interest rates because about 60% of consumers were moving into fixed interest rates to hedge against the possibility of further rate increments, so the demand was in fixed interest rates.
Rates then moved up about 5 – 10bps for the next 2 quarters, and in late Oct / early Nov we saw the 3-year fixed rates break the 2.00% mark. Toward the end of 2018, there was a lot of anticipation about where interest rates were headed to, but sentiments on the ground were that more rate hikes were expected. As a result, the market moved to price in the potential rate hikes again.
It was in the first half of 2019 that we saw drastic increments in both the 2-year and 3-year fixed interest rates as demand for fixed rate had reached about 70%. 2-year fixed interest rates at the start of 2019 were sitting as high as 2.48% and 3-year fixed interest rates were at 2.68%, and even as high as 2.88% at one point of time. Only towards 2H of July 2019 did we see a reduction in fixed rates when the US Feds cut their interest rates by 25bps in an attempt to bolster the stock market and help the economy sustain its growth.
The narrative this time round in 2022 is a little different. High Inflation is a concern (it wasn’t back then in 2018), and to combat rising inflation, there are already talks of multiple rate hikes in 2022 and 2023. If anything, one might expect that interest rates would move more aggressively this year.
That said, there are still many uncertainties, raising rates that fast might result in a potential recession, coupled with the uncertainties of the impacts the Russia and Ukraine conflict may bring about, the US Fed is definitely going to have a tough job trying to balance these factors to achieve their goal.
How Will This Affect Mortgage Rates In Singapore?
We have not seen any knee jerk reactions in the market today since the announcements were made by the US feds to raise the Fed Fund rate by 25bps. We believe the rate hikes have already baked into mortgage prices and the reality is that mortgage rates, in particular fixed interest rates, have already started to inch up at the end of 2021. In Q4 2021, we saw 3-year fixed interest rates sitting at 1.15%, and today, the 3-year fixed interest rates have risen to 1.85%. Many banks have cited that the upward pressure on fixed interest rates was caused by the rising cost of funds.
To get a sense of how this would impact the mortgage rates in Singapore, we think it’s best to look back into 2017 – 2018 when the US feds first hike interest rates in a similar fashion; in steps of 25bps, 3 times in 2017 (technically the first increase happened on 14th Dec 2016, and 2 more in 2017), and 4 times in 2018.
US Fed rate hikes
| Date | Rate Before | Direction | Rate After | Change |
| 14 Dec 2016 | 0.50% | ↑ | 0.75% | 0.25% |
| 15 Mar 2017 | 0.75% | ↑ | 1.00% | 0.25% |
| 14 Jun 2017 | 1.00% | ↑ | 1.25% | 0.25% |
| 13 Dec 2017 | 1.25% | ↑ | 1.50% | 0.25% |
| 22 Mar 2018 | 1.50% | ↑ | 1.75% | 0.25% |
| 14 Jun 2018 | 1.75% | ↑ | 2.00% | 0.25% |
| 27 Sep 2018 | 2.00% | ↑ | 2.25% | 0.25% |
| 20 Dec 2018 | 2.25% | ↑ | 2.50% | 0.25% |
| 31st Jul 2019 | 2.50% | ↓ | 2.25% | -0.25% |
In 2018, the forecast was that the US Feds would raise interest rates 2 – 3 more times. Eventually, we ended up with 4 increases just before we ended 2018. The forecasts in 2022 made by many analysts and members of the Federal reserve sits at 6 increments, with some other private banks forecasting a potential 9 hikes.
The way interest rates are priced today looks very similar to how they were priced back in 2018. For instance, a 2-year fixed interest rate today sits at 1.65%, and a 3-year fixed interest rate is at 1.85%. In January of 2018, 2-year fixed interest rates were sitting at 1.65% – 1.68%, and 3 year fixed interest rates were priced at 1.70% – 1.85%.
Summary
With reference to a recent Business Times article, it is also anticipated that there will be at least two and possibly three interest rate hikes in 2022. As shared earlier, many banks have already raised their 2-year and 3-year fixed rates recently.
In general, it is encouraged, amidst uncertainty, to err on the conservative side and move into a fixed rate to hedge against a higher probability that rates would continue to increase. Hence, you are strongly encouraged to review your home loan packages.
Of course, this decision would also depend on individual’s circumstances as well. For example, floating interest rates often allow more flexibility, features that allow flexibility in making partial repayments on the mortgage, ability to sell the properties within the lock-in period without incurring penalties or even the ability to lower the effective interest rate further and mitigate the impacts of rising interest rates with liquid deposits, are considerations before deciding whether a fixed or floating rate is better suited.
Hence, it is always in your best interests to seek mortgage advice on the options available in the market to shortlist those that meet your objectives. Do chat with Redbrick Mortgage Advisors to evaluate your property portfolio and make well-informed decisions in order to achieve your real estate goals!
