When anyone ever utters the phrase “monetary policy”, it can generally be a great way to lose someone’s attention. However, with the latest interest rate move from the US Federal Reserve (Fed), we should definitely be paying attention to the monetary policy of the world’s most influential central bank.
On 18 Sep 2024, the US Fed cut its benchmark interest rate by 50 basis points (or 0.5%)—meaning it’s now down at a range of 4.75% to 5%.
While the general belief is that lower interest rates are good (cheaper money, yay!), lower rates also have an outsized impact on one of the biggest purchases of our life; our home.
That’s because mortgages are typically required to purchase a home—unless you’re mad rich and can just whack down 100% of the purchase price in cash like a baller. However, for the majority of us, paying a mortgage for our home is a fact of life.
So, with the interest rate having now been cut in the world’s largest economy, how does that affect us as property owners? Here are two big ways the latest Fed move impacts Singaporean homeowners.
1. Cheaper refinancing or repricing
When we take on a mortgage, the big thing we focus on is the interest rate we have to pay on the loan we take out. That’s pretty obvious.
That exact rate is going to be determined by the level of interest rates within Singapore, typically defined by the Singapore Interbank Offered Rate (SIBOR) or Singapore Overnight Rate Average (SORA). That’s basically financial jargon for the short-term rate at which banks lend to each other in the open market.
Acronyms aside, what does that actually mean for me, you may ask. Well, the SIBOR and SORA are impacted by the Fed Funds rate (the interest rate) that the US Fed sets. That then has a knock-on effect of affecting the mortgage rates offered by banks.
One of the biggest consequences of the latest Fed rate cut is that interest rates are now starting to fall. The pace of that fall and where interest rates will sit in 6 or 12 months’ time is anyone’s guess but what we can do is actually make use of the fact that they’re coming down.
How do we do that? Simply put, it’s refinancing our current mortgage rate at a lower rate with a different bank or simply repricing our existing loan with our current bank.
With either one, it makes sense to revisit your current mortgage, as well as monthly payments, and understand if you can save money by refinancing. Currently, the act of refinancing or repricing your existing home loan falls into 2 buckets.
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Do I go with fixed rate or floating rate?
The big decision most Singaporean homeowners will have to make—once confirming they can indeed save money by refinancing or repricing their loan—is what type of loan to take.
Remember that mortgage loans are either fixed rate (in that you pay the same rate for a set period of time) or floating rate, meaning the interest rate you pay changes with the broader interest rate environment.
You’ve got to understand the intricacies of the “fixed vs. floating” debate when it comes to falling interest rates. If we just take a look at the 3-month compounded SORA (remember that’s the benchmark lending rate in Singapore), it was at 3.53% in mid-September.
On the whole, banks like to price their floating rate mortgages at SORA + x.xx% so they’re offering you the loan at the short-term rate but normally with around 0.6% to 1% on top of that rate. The benefit of a floating rate mortgage is that your monthly repayments can continue to fall if the SORA rate continues to drop. What drives that drop here will likely be further cuts to the Fed Funds rate by the US Fed.
But what about fixed rate mortgages? Well, these will offer a lower interest rate (versus SORA) for those that go down this route but you have to pay this “fixed” rate for a set period of time—normally 2 years. This lock-in period means you won’t benefit from further cuts in interest rates, although there are loans out there that allow you to switch to floating rate terms after the first year is up.
The big benefit of the fixed rate mortgage is that you know what you’ll be paying for the duration of the lock-in period, whereas with the floating rate route it’s more of an unknown whether the SORA rate will get down to a level which saves you money within those two years.
What are the mortgage rates like now?
Currently, the lowest 2-year fixed mortgage in Singapore is around 2.6% and that has already come down from around 3% at the start of 2024. One thing we should be aware of is the fact that mortgage rates are actually “pricing in” future expectations of where the Fed Funds rate might be in the next few years.
At its latest gathering, the US Fed projected that the Fed Funds rate will be 3.4% by the end of 2025 and 2.9% by the end of 2026. It’s all a little abstract but the jist of it is that the SORA will likely gradually move down in a similar fashion. The upshot is that, for rates to drop at a faster pace, markets will have to believe that there will be more rate cuts than are currently projected.
The TL;DR of all this? Cheaper fixed rate refinancing or repricing is likely going to be the most popular option for Singaporean homeowners that want to benefit from the Fed’s latest interest rate cut.
2. More disposable cash
The likelihood is that if you are going to refinance or reprice your existing home loan, you’re going to be saving a decent chunk of moolah. Think about it. Even a reduction in the interest rate of 10 or 20 basis points (0.1% or 0.2%) can save you money on monthly repayments.
Say you have an $800,000 mortgage and you’re opting to refinance with a two-year fixed rate. If you have the option to review your rate after 12 months, you could save significant amounts of money even in the short term. Seeing that rate fall 0.1% could save you $800 per year while a 1% drop on that rate could save you $8,000 in just one year.
That’s some serious money that could go back for us to use to deal with the rising prices of everything in Singapore right now, from dining out to groceries and transport costs. Those marginal savings in interest payments can add up to a lot of cheddar over a few years.
What else we can do with that cash (besides spending it) can also be considered. Whether that’s topping up our CPF with voluntary contributions or channelling some of those funds to our Supplementary Retirement Scheme (SRS), the excess funds can help us with both daily expenses and growing our wealth/retirement funds.
ALSO READ: What Happens To Your Cash When The US Federal Reserve Cuts Interest Rates?
Be smart about the interest rate situation
Overall, with interest rates falling, it’s a better time to be a Singaporean homeowner having to deal with their mortgage payments…finally! So, that means doing the maths in detail to ensure that you can save money by refinancing or repricing your existing home loan.
Understanding whether you opt for the fixed rate route or the floating rate option is also key to mapping out how much you of your hard-earned cash you can save—because who has ever enjoyed handing over more money than necessary to banks?!
Additionally, with more cash in our pockets, we should be able to better deal with the rising cost of living in Singapore. Alternatively, we could also direct that extra cash so that we can make more headway with our retirement plans or wealth building goals for the long term. At the end of the day, falling interest rates are certain to benefit Singapore homeowners.
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