It’s always good news to hear about a nation that’s finally recovering from a long economic slump right? Sure, unless the recovering nation in question is the United States of America. Well, politics aside, people all over the world have a strong interest in seeing the U.S. Federal Reserve in economic recovery mode – including Singaporeans.
Because it was the 0% U.S. Fed interest rate that kept Singapore’s home loan interest rates so low over the last few years. But all that changed once the U.S. Federal Reserve Chair Janet Yellen hinted that interest rates would go up by April 2015.
That only means one thing – you can expect Singapore Interbank Offered Rates (SIBOR) to rise too. Yes, that means your home loan payments are about to get more expensive. Should you be considering refinancing your home loan? The time to do so could be coming soon.
Whoa, Relax! There’s No Need to Panic… Yet
Yes, your home loan repayments will increase very soon. But don’t expect some subprime mortgage doomsday scenario where Singaporeans will be evicted from their homes and forced into Mad Max-like highway banditry to survive. On the contrary, SIBOR interest rates (3-Month SIBOR) will rise very slowly from .402% now, to about 0.78% by Q1 of 2015.
In other words, there’s no cause for alarm right now. Still, you should keep an eye on the following effects of the interest rate hike:
- Say Goodbye to Low SIBOR Rates: SIBOR-based home loan packages will increase gradually within “reason,” but don’t expect the SIBOR rates to remain as low as they have been since 2009. Rates will trend upward slowly, but surely.
- The Stress Test Embankment Will Hold: Don’t expect rising interest rates to flood Singaporeans with higher home loan repayments. The interest hike will remain well within the “stress test” values of 3.5%, but home owners should ensure that they have a good financial “buffer” to absorb the interest rate increase.
- Rising Interest Rates Won’t Lower Property Prices: Rising SIBOR interest rates won’t cause property prices to plummet. On the other hand, if they do, it’s more likely that Singapore’s cooling measures are the cause.
But You Should Start Worrying When…
I did tell you not to panic right? Well, about that. I’m not saying you should just completely ignore the SIBOR interest rate increase. Yes, the increase will be small, and it will continue to increase at a slow place… hopefully.
But if the interest rate rises quicker than anyone predicted and passes the 1% mark – that’s when the financial pain will start to hurt your pocketbook.
Want to know how painful a real SIBOR interest rate hike will be?
Here’s an example of how much the current SIBOR rate is compared to a 1.78%, 2.5%, and 3% increase:
30-Year Home Loan Monthly Repayments
1% + SIBOR Rate
$1 Million Dollar Home
|1% + 0.4 (current) = 1.4%||
|1% + 0.78 (Q1 2015) = 1.78%||
|1% + 1.5% = 2.5%||
|1% + 2.0% = 3.0%||
As you can see, your payments will go up from about $90+ to $180+ in Q1 2015, depending on the value of your home. Again, interest rates will rise higher over time. But that’s no reason to panic, because rates are expected to rise slowly enough for you to prepare yourself financially.
What Should You Do About the SIBOR Interest Rate Hike Then?
The first thing you should know about this “small” interest rate rise is this – it’s only going to rise further. Does that mean you should just sit around and wait for interest rates to rise? Not necessarily. There are some things you can do delay the inevitable interest rate hikes, at least for a few years.
Here are two things you can do to protect yourself from the inevitable SIBOR interest rate increase:
- Start Comparing Home Loan Packages: If you still have more than $300K outstanding on your home loan and you last refinanced more than 4 years ago, right now is a good time to start comparing refinancing options to see how much money you can save before rates really go up.
- Switch to a SIBOR/SOR Fixed Rate Package: If your currently have a SIBOR/SOR floating rate home loan package and the rate increase is starting to worry you a little, you might want to switch to a floating rate package so you can lock-in your SIBOR/SOR rate for the next 3 years.
You can use this refinancing wizard on MoneySmart.sg to compare your existing rate with refinancing packages currently on the market. It’s about the quickest and easiest way to evaluate your refinancing options before rates get higher.
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Tags: Home Loans