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Facing Up To Rising Mortgage Rates

Make your idle cash work harder to make up for the higher expenses

“Have you fixed your mortgage yet?”

Chances are, you would have heard this question making its rounds at dinner conversations these days. (Anything fixed below 2% is a cause for celebration.) The fervour comes as mortgage rates have spiked dramatically this year, in line with aggressive Fed rate hikes.

Such rate hikes are done to cool red-hot inflation, which has proven stickier than initially expected. By raising rates, central banks are effectively making it more expensive for consumers (and businesses) to borrow money. This can curb demand, which in turn brings prices down.

But by pulling back growth, central bank moves can trigger an economic contraction — in other words, a recession if this occurs for two straight quarters. This is the economic climate that consumers are working with today: a higher debt burden, higher inflation, and higher risks of stagnating wages and job losses when business slows.

Meanwhile, Singapore regulators introduced on 30 Sept 2022 new property cooling measures, which included tighter maximum loan quantum limits for housing loans to ensure prudent borrowing and avoid future difficulties in servicing home loans.

Goodbye, Sub-1% Mortgages

The latest advertised fixed mortgage rates from banks are mostly over 2.5% per annum (p.a.) in the first two years — the typical lock-up period when signing on a mortgage package.

That pales against the sub-1% floating rates that some banks were offering in 2020. The world was in a different place then: central banks around the world reduced rates to secure continued liquidity in the financial system to prevent an economic collapse from a global pandemic.

The dynamic environment today can leave us all a little lost and anxious. But there are ways to ease some of these concerns.

With the dramatic shift to sharply higher borrowing costs in focus today, let’s look at some options to manage your mortgage payments in this rising rate environment.

Lock In Fixed Mortgage Rates

Debt has been cheap for decades now, and consumers who took mortgages on floating rates particularly capitalised on the low rates. Using floating rates means that your mortgage fluctuates according to the benchmark rate.

Older mortgages using the floating rate tend to be priced on the 3-month Singapore Interbank Offer Rate (Sibor). Because Sibor will be replaced by the Singapore Overnight Rate Average (Sora) by 2024, newer mortgage packages tend to be priced on Sora.

Banks can also offer floating rates based on board rates, essentially rates that are determined at the discretion of the lender.

But as the chart shows, Sibor has jumped dramatically since the first quarter of this year.

As of 30 Sep 2022, the 3-month Sibor stood at 3.16876%. On 3 Jan 2022, it was a mere 0.4375%.

Source: The Association of Banks in Singapore

Most consumers today will choose to lock in fixed rates, be in with a new loan or via a refinancing deal.

As of June 2022, fixed rates stood at around 2.6% to 2.75% for 2-year home loan packages. That was then. In October, The Straits Times reported that home loan rates in Singapore have hit as high as 3.85%.

To be clear, because each new batch of fixed-rate mortgage packages rolled out by the banks accounts for rising rates ahead, you would typically be paying more on fixed-rate loans compared to current floating rates, in exchange for stability.

The difference is that this is a period of rapidly rising rates, so there is reason to value stability in our mortgage payment more in today’s context, compared with the situation of low rates just a few years ago.

Still, as with all financial decisions, each individual should weigh his or her needs and considerations — for example, if you are planning to sell an apartment unit in six months, refinancing your mortgage now would likely put you on the hook for a prepayment penalty when you pay off the loan with the sales proceeds.

Some lenders are offering hybrid options, packaging with a fixed rate for the lock-in period of two years, and floating rates from the third year onwards. Banks typically offer a one-time free change in interest rate packages at the end of the lock-in period.

After signing the mortgage, set a calendar for your mortgage review two years from the latest rate review date. Because of the volatile economic climate over the next two years, it pays to be monitoring the rates carefully, so you can review your package in a timely manner when the lock-in period is up.

HDB Loans Back In Favour

HDB loans were highly uncompetitive as recently as two years ago, but how the tide has turned. Because of the way it’s calculated — pegged at 0.1% above the CPF Ordinary Account (OA) interest rate that is at 2.5% p.a. — a HDB loan package remains priced at 2.6% p.a.

So for those who are lucky enough to have secured a Build-to-Order (BTO) flat and are close to getting your keys, look closely at the options provided by HDB when it comes to a mortgage.

You can switch to a bank loan later, but note that you can’t reverse course into a HDB loan once you’ve taken a bank loan.

New Property Cooling Measures

There are also new property cooling measures to note.

In Q3 2022, the Singapore regulators tightened rules that took effect on 30 Sept 2022 around HDB housing loans, lowering the loan-to-value (LTV) limit for HDB housing loans from 85% to 80%. In other words, the amount that HDB will lend to flat buyers will be no more than 80% of the price of the property.

Since both first-time buyers and buyers from lower-income families can access significant housing grants, the impact of the tightened LTV ratio should be limited for them. The tightened LTV limit will apply to new flat applications for sales exercises launched and complete resale applications that are received by HDB on or after 30 Sept 2022.

HDB’s concessionary interest rate of 2.6% p.a. is unchanged.

But for new applications for an HDB Loan Eligibility starting 30 Sept 2022, it will introduce an interest rate floor of 3% p.a. to calculate the eligible loan amount.

The Monetary Authority of Singapore (MAS) has also raised by 0.5%-point the medium-term interest rate floor used by private financial institutions to compute a borrower’s TDSR and MSR.

The regulator said the move reflects higher interest rates expected over the medium term, compared to the period of exceptionally low rates from 2013 to 2021.

Source: MAS, MND

Weigh Pros And Cons Of Mortgage Repayment, CPF VHR

Given the rising mortgage rates, some may wonder if they should repay early. Do the sums of paying the penalty of early repayment, and decide whether you have enough liquidity to cover your daily costs and any emergency expenses that may crop up.

You can also consider using cash to voluntarily refund the amount taken from your CPF OA to pay for your property. The refunded amount earns 2.5% interest. Between 2019 and 2020, the total refunded amount via the CPF Voluntary Housing Refund (VHR) scheme roughly tripled to nearly $1.5 billion. You can learn more about VHR in our special podcast episode with The Financial Coconut here.

Be Cash Smart: T-bills and SSBs VS Cash Management

A mortgage is a long-term commitment, with the monthly payment stretched across decades. Once you figure out how much more you are paying in your new mortgage bill, find a way to ensure that your existing cash is being worked harder to make up for the higher expense.

One way to instill discipline is to ensure that for every $1 that goes into paying your mortgage, another $1 is put to the investing grind.

An option that has been rising in popularity is the 6-month Treasury bills (T-bills) in Singapore. Auctioned twice a month, these short-term instruments have been rising in yields.

These money market instruments can help investors earn a better return on their cash savings. Because of their short-term nature, you get the principal back in six months, and you can deploy the money again in new T-bills that will rise in yields, in tandem with the US Federal Reserve’s continued rate hikes.

The downside is that unlike with Singapore Savings Bonds (SSBs), you cannot redeem the T-bills online ahead of their maturity, so keep this constraint in mind. (You can trade them at the main branches of the three local banks, but there is hassle and liquidity risk involved, so the optimal way to think about buying T-bills is to assume that you intend to hold them till maturity.)

Given the current yield inversion — where long-term yields are paying less than short-term yields because bond investors see a recession ahead — note that the 10-year average return of the September SSB tranche is lower than that compared to August. The September SSB’s one-year yield of 2.63% is also weaker than the 3.32% yield from the 6-month T-bills auctioned on 29 Sept 2022.

If relevant to you, you may consider cash management products. For example, the yields of Endowus’ Cash Smart Secure have been rising and the Endowus platform allows investors to redeem their funds from their cash management portfolios at no additional cost. For investors who want flexibility, having no lock-in restrictions is a perk. The current projected range of returns for Cash Smart Secure is at 2.6%-2.8%.

Financial Planning For The Long Term

Of course, while the mortgage burden hits us monthly, the reality is that it is a major long-term debt commitment and comes alongside other big-ticket expenses in life that are becoming more expensive.

Taken in totality, it is worthwhile looking at how you are investing beyond low-risk cash management products that do not beat inflation rates.

Investors should look at their long-term commitments at hand, and can consider putting money into investment-grade bonds that are also rising in yields, or in global stocks that have hit new lows in 2022. Endowus has a whole suite of portfolios — ranging from advised Income Portfolios and Flagship Portfolios, to tactical options provided on our Fund Smart platform — curated for investors to make their cash savings work harder for a more comfortable future.

With digital wealth platform Endowus, you can plan and manage your money — whether held in cash, CPF or SRS — by investing in globally diversified, intelligent, low-cost portfolios seamlessly. To get started, click here.

If you’re interested to start investing with Endowus, you’ll be happy to know that DollarsAndSense readers can enjoy $20 off their access fee till (equivalent to $10,000 advised free, assuming an Access fee of 0.40%). Sign-up using this link to claim this special offer. Terms & Conditions apply.

This article is originally from Endowus Insights. Endowus Insights has just launched a Fin.Lit curriculum series to help investors get started on their investing journey.