Home Loan Interest Rates Are Set To Rise – Is It Time To Start Planning To Refinance Your Mortgage? (Dec 2021)

Home Loan Interest Rates Are Set To Rise – Is It Time To Start Planning To Refinance Your Mortgage?
Home Loan Interest Rates Are Set To Rise – Is It Time To Start Planning To Refinance Your Mortgage?

After living through the circuit breaker and pivoting to remote working, many Singaporeans have had enough of living with parents or tripping over their kids every five seconds due to lack of space.

In other words, the housing market has been positively booming in the past year. Thanks to the pandemic, interest rates have also been very low, which has made it cheaper to borrow money to finance a home purchase.

But MAS, ever the bearer of bad news, has issued warnings in April and December 2021 that interest rates are going to rise. If there’s one thing that can be said about the government, it’s that their threats are never empty.

What this means is that home loans are going to become more costly, and new home owners need to be very careful to ensure that they don’t take out loans that they’ll have difficulty paying in future.

What is happening?

When Covid-19 first started, the economic damage sustained by economies around the world was disastrous. Thanks to the lockdowns, businesses got shut down and everybody basically holed up at home instead of spending money. Governments started to lower interest rates in order to stimulate their economies, since lower interest rates encourage people to spend more.

As the world recovers economically from Covid-19, interest rates are going to rise once again. Analysts predict that this will happen beginning in 2022, with the full impact of the hike being felt in 2023. For starters, the US Fed plans to hike interest rates in 2022, possibly beginning in June. When that happens, Singapore interest rates are likely to follow suit.

That said, many of these predictions were made before Omicron, when the world was still feeling optimistic about a return to normalcy.

If Omicron causes the world to go back into lockdown and/or slows economic recovery, interest rates might stay depressed a while longer (and so will we). At the moment, some governments are likely waiting to see the economic impact of Omicron before raising interest rates.

Nobody knows how much interest rates will rise by. But when creating hypothetical scenarios to gauge the impact of an interest rate hike, MAS cited a possible “stress scenario” as being a 2.5% increase in mortgage rates and a 10% drop in household income. Hopefully things won’t come to that.

Will this affect my HDB home loan?

If you opted for an HDB loan rather than a bank loan, you can thank yourself for making the safe choice. In the near-term, you should be unaffected by the rise in banks’ home loan interest rates.

Technically, HDB can choose to increase their interest rates. However, if they do that, the CPF Board will also need to increase our CPF interest rates. So it is not a decision they will make lightly or as a knee-jerk response to the impending global interest rate hikes.

How will this affect my bank mortgage?

If you have an existing home loan, you should monitor interest rates very closely, as even a slight rise in interest rates can send your home loan installments heavenwards.

Let’s punch some numbers on a home loan calculator and see how a 2.5% increase in home loan rates can affect your monthly installments.

Property type Loan amount Tenure Interest rate Monthly installment
4-room HDB flat $300,000 30 years 1% $965
4-room HDB flat $300,000 30 years 3.5% $1,347
Condo $1,000,000 30 years 1% $3,216
Condo $1,000,000 30 years 3.5% $4,490

As you can see, an interest rate hike could mean paying hundreds of dollars more per month.

So how? Refinance lah!

If you have a floating rate home loan, you will feel the effects of the hike immediately as your interest rate is pegged to SIBOR or SORA. You’ll want to shop around for home loans on the market offering more competitive interest rates.

Those with a fixed rate home loan package are safe until the end of the lock-in period, but once it ends you’ll be at the mercy of a floating rate. A few months before your lock-in period comes to an end, you should pick out a new home loan package and, if necessary, ask your lawyer to time the refinancing to coincide with the end of your lock-in period.

What is refinancing?

Refinancing is basically swapping out an existing home loan for a new one. You do that in order to switch to a loan with a lower interest rate, which will save you money in the long run.

The catch is that refinancing costs money upfront and requires quite a bit of paperwork. You’ll have to shop around and apply for a new package, and then engage a lawyer to manage the refinancing process. Depending on your property, you should budget about $2,000 to $3,000 for this.

Refinancing also takes time, so you should give yourself a window of about 4 months. You will need about 2 to 3 weeks to apply and get a letter of offer from a new bank. Once that is done, your existing bank needs to be given at least 3 months’ notice before the refinancing process is completed.

Whether you should refinance or not is a question of dollars and cents. If home loan interest rates rise as predicted, refinancing could potentially save you a lot of money.