We have been reading news lately that discussed about how the Federal Reserve (Fed) is going to increase interest rates in the United States. The big question we ask ourselves is how this expected increment is going to impact the lives of the average Singaporeans.
Increase In Monthly Mortgage Payments
Singapore Interbank Offered Rate (SIBOR) is the benchmark used by Singapore banks to determine the interest rate to charge when it comes to mortgage lending. How it works is that banks would add a premium (also known as a spread) on top of the SIBOR rate to determine the final interest rate that we need to pay for our monthly mortgage repayments.
In January 2015, the SIBOR rate was at 0.5% (rounded up for simplicity). Assuming that a bank’s mortgage premium is 1.0%, the interest that a couple needs to pay on his house will then be 1.5% per annum (0.5% + 1%)
The couple would have paid $1,400 per month for a property loan of $350,000 back in January 2015.
Fast-forward 12 months and the December SIBOR rate is now at 1.1%. Again, assuming the same premium of 1.00%, total interest rate would be 2.1%. The monthly repayment would now be $1,501, or about $101 more each month.
Decrease In Property Value
For those of you who understand the concept of present valuing, you would know that the higher the interest rate, the lower the present value of an asset. Similarly, as the cost of borrowing from banks increase, the current value of our properties is expected to be lower.
This can be seen from the lackluster property prices in previous quarters. Property prices and sales have been sluggish with negative outlooks. Of course, policy changes such as the introduction of the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR) in 2013 are also major factors that have contributed to decreasing property prices.
Yet at the same time, it would be unwise to entirely blame the slowdown of the property market in Singapore as a result of these policies, while ignoring the fact that rising interest rates would have also dampen the property market.
Going forward, if interest rates were to continue increasing, the cost of borrowing will also increase in tandem. Potential property investors and genuine shelter purchasers may postpone their plans to buy property, causing demand to decrease and prices to continue dropping.
That being said, Singapore is also known to be a property safe haven (particularly for the rich). Thus, while we expect property prices to continue slipping, it would be unrealistic to expect a 50% depreciation from current prices.
Based on the Singapore Real Estate Exchange Property Index, we did not observe a huge dip in property prices even during the financial crisis period of 08/09. For those who are intending to get their first home, it would not be wise to continue waiting for a price reduction miracle to happen.
Increase In Bank Deposit Interest Rates
The increase in overall benchmark interest rates will put upward pressure unto our bank deposit interest rate. In the Singapore deposit climate, banks are competing aggressively against one other to be the bank of choice.
Decades ago, POSB (now subsumed under DBS) did an excellent job in introducing the POSB Squirrel Account which made almost every Gen Y person have a POSB account.
In recent years, it has been evident that both OCBC and UOB have stepped up its game by introducing the OCBC 360 and the UOB One account. Both these banks provides more than 2% effective interest rate if you fulfill a few basic criteria.
There are also overseas banks, such as Maybank and CIMB Bank, that have introduced varied types of deposit accounts that give more than the 0.05% annual interest rate that we used to get in the past.
Let us hope that banks will continue to compete aggressively for the money in our saving accounts so that we, the consumer, will ultimately benefit more from it.