Rising Interest Rates – 5 Ways You Can Manage This Uncertainty

There is some tension in the air as Singapore banks starts increasing their interest rates for mortgage loans.

For existing homeowners, they now have to grapple with the idea of paying more per month after years of enjoying low interest rates.

I noticed also buyers are starting to hold back on their purchases.

I think the rising interest rates are inevitable as the economy tries to recover from all the liquidity that was infused into the markets during the pandemic.

So what can we do on our end?

Instead of panicking and endlessly worrying, I hope this article can help you set your mind at ease.

Anxiety usually happens because we don’t have a proper plan and did not make enough preparations.

Here are 5 ways for you to manage this uncertainty:

#1: Find Out Exactly How Much More You Will Be Paying

Let’s first take a look at the impact of the increase in interest rates by looking at how the interest will affect the monthly mortgage of $1.333mil purchase.

Purchase price: $1,333,000

Loan: $ 1mil (75% loan-to-value)

At this time of writing, for a loan of $1 million, the fixed rates in approximately 1.4% and 2.5% for fixed rates.

A 1% increase in interest translates to approximately $500 increase in monthly mortgage for a $1 mil loan.

By keeping track of how much more you might have to pay, this allows you to better plan your budget by understanding the impact of the increase.

#2: Clarify Whether You Should Take A Fixed Rate or A Floating Rate

At the time of writing, the difference between fixed rates and floating rates is a difference of 1%, for a loan amount of $1mil, it is approximately $500 difference a month.

I would say in devising the fixed rates, the banks would most likely have factored in their risk in the event that interest rates raised above their fixed rates.

Therefore, I feel it is not very likely to happen.

If you are able to handle the risk of increase in monthly mortgage, in my opinion, you can benefit from the current difference of 1% by going for the floating rate.

However, if any increase in monthly mortgage may have a very uncomfortable impact on you, then you might want to go for the fixed rates which can help you plan your finances with more certainty.

#3: What if interest rates continue to increase after my purchase?

What can I do if the interest rates continue to increase after my purchase and I am feeling the stress in repayment of the monthly mortgage?

This is subject to bank approval and MAS policy at that time:

But there is a possibility to do a refinance to increase the loan tenure from 65 years old to 75 years old (capped at 35 years loan tenure).

(Below is a simple illustration for educational and awareness purposes. Please speak to a real estate professional or banker for more details on the terms and conditions.)

Example:

The borrower’s age is 40 years old with a loan tenure at time of purchase is maximum 25 years. (up to 65 years old, capped at 30 years loan tenure.)

The monthly mortgage for a $1mil loan, interest at 1.5%, 25 years loan tenure will be $4000.

Assuming refinancing was done 1 year later to 75 years, the new loan tenure will be 34 years.

Monthly mortgage for a $1mil loan, interest at 1.5%, 34 years loan tenure will be $3130.

This is something you can consider if you interest rates continue to rise higher and higher.

#4: The Relationship Between Property Price Index and Interest Rates

Let’s take a look at what happens to the property price in the past when interest rates increases.

In the chart below, the blue line is the Property Price Index and the orange line is the 3-month Sibor rates.

It doesn’t seem to indicate that when interest increase, prices will fall.

We can observe that increase in interest rates is a way to increase the strength of Singapore Dollar to curb inflation and to keep our currency competitive.

But it also can be a reflection of the underlying demand for funds from borrowers.

And that’s why interest rates for borrowers can increase right?

Which means the underlying demand for housing loans remains healthy in that sense.

If nobody is borrowing, how can the bank increase the interest rates?

#5: Shrinking Pool of Committed Buyers

If you are someone who is always on the ground and interacting with various buyers, you will notice that many of the potential buyers are more cautious now.

Some have even shelved their purchase plans.

So the overall pool of buyers have become smaller and smaller.

Less competition for buyers who remain committed to purchase something.

Now, there might not be a significant drop in property prices.

But it is easier right now to secure your ideal unit whether is it resale or new launch.

It is also getting easier to negotiate terms and conditions with owners.

Why? As the pool of ready buyers making offers for their unit is shrinking.

AMO Residences collected over 1000+ cheques during the launch period.

If interest rates had not increased, there might have been over 3000+ cheques collected.

There will definitely be a pool of buyers who choose to wait.

And many of these buyers will eventually create a pent up demand eventually in the future.

Imagine wanting to buy something really badly. But you keep holding back.

Eventually, once the opportunity to buy appears again – you will quickly snap it up for fear of missing out again.

For example, when Covid first broke out in 2020, a lot of buyers pulled back because of uncertainty.

They waited for awhile.

But those who still chose to buy in 2020 benefited.

2 years on, many are realizing that they are sitting on paper gains as prices increased significantly.

Prices Doesn’t Seem To Be Coming Down

As we recovered slowly from Covid and economic activity starting to return, these buyers noticed that prices are not coming down.

So what happened was a lot of buyers started to become impatient and enter the market – offering higher and higher prices in order to secure a property.

When owners and developers see a renewed buying interest, they increase their price.

Seeing the price increase, the buyers become even more FOMO and causes prices to go up even further.

This is a very typical market reaction.

In this case, it becomes worse – no thanks to the limited supply and construction delays.

Today a similar opportunity might happen.

Here’s what might happen next:

Interest rates move down.

Or people start to get used to this level of interest rates.

Or their patience runs out.

And they start buying again.

By then, will there be an opportunity for sellers and developers to increase their price?

Consider the Long-Term Game We Are Playing

For any property investment, it is essentially a long term plan especially if it’s part of your wealth creation and retirement plan.

It is about how much time we remain invested in the market.

There’s a well-known saying: we overestimate what we can accomplish in a day, and underestimate what we can accomplish in a year.

That’s true, and it’s even more true that we radically underestimate what we can accomplish in a decade.

Just like with an investment in the stock market, the power of compound interest with time is dramatic.

We tend to win if we keep on playing for the long term.

Have questions on your own property options? Drop me a whatsapp message.

Our discussions are no-obligation.