Impact Interest Rate Cuts Home Loans Good Time Refinance
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Reports have emerged that US Federal Reserve chair Jerome Powell has given indications of an impending interest rate cut during the next Federal Open Market Committee meeting in September. However, Jacquelyn Tan, head of group personal financial services at UOB, says the extent of the rate cut and its subsequent trajectory remain uncertain.
According to associate director at Redbrick Mortgage Advisory, Clive Chng, Singapore interest rates have historically followed those of the US. When the US rates increase or decrease, Singapore rates and mortgage rates are likely to follow suit.
Maybank Investment Banking Group’s regional co-head of macro-research, Chua Hak Bin, says that Singapore’s interest rates have already been declining in anticipation of US rate cuts. With the expectation of a more relaxed monetary policy and a decrease in US rates, mortgage rates in Singapore are also expected to fall.
Additionally, fixed-rate mortgage packages have become more affordable, with some banks offering them at around 3%. The three-month Singapore Overnight Rate Average (Sora), which is used by local banks as a benchmark for floating mortgages, has also declined. At the start of the year, Sora was at 3.701%, while as of August 28, it stands at 3.572%.
Chua from Maybank expects that the three-month Sora rate will drop to 3.4% by the end of the year. He also estimates a cumulative rate cut of 50 basis points (bps) by the end of 2024. As such, it is possible that the three-month Sora rate could go down further to 2.7% by the end of 2025.
Taking advantage of lower interest rates
Chua advises homeowners to take advantage of the current lower interest rates by refinancing their mortgages. However, he warns that the transition to a Sora benchmark may lead to some homeowners experiencing an increase in their mortgage rates. He suggests that homeowners stay flexible and avoid locking themselves into a loan package, especially with the expectation of a decline in interest rates. As such, a variable rate package with a one-year lock-in may be a better option.
A lower mortgage rate will also allow homebuyers to qualify for a higher loan sum, as most banks use the Sora + 1% interest rate as a stress test. If a buyer with a combined monthly income of $16,000 and a 30-year loan tenure can borrow up to $1.7 million, a 50 bps decrease in the stress test rate will result in an increase of $100,000 to $1.8 million.
To reprice or refinance?
Some homeowners may consider repricing or refinancing their mortgages. However, there may be fees involved when repricing, while refinancing to another bank may incur additional costs such as legal and valuation fees, prepayment penalties, or clawback of subsidies. As such, Tan suggests that homeowners calculate if the potential savings from refinancing outweigh the additional costs involved.
Fixed-rate loans are more affordable
Banks have priced fixed-rate loans more competitively than Sora-pegged loans in the past year, and this trend is expected to continue into 2025. At OCBC, for example, a one-, two-, and three-year fixed-rate mortgage packages are offered, as well as floating rate packages pegged to the three-month Sora. According to Maryanne Phua, head of home loans at OCBC, the two-year fixed-rate package is the most popular, and its price has been reduced by 0.35% compared to a year ago.
Some banks also offer free conversion between fixed and floating rates after a year, or a one-year fixed interest rate with a two-year lock-in period, which allows the homeowner to switch to a variable interest rate package in the second year. Moreover, banks may also offer fully subsidised valuation and legal fees to compete in the current loan environment.
Interest rates in Singapore are expected to decrease slowly, although it is unlikely to fall significantly. Chng from Redbrick says that unless there is a recession, interest rates will see a slow downward trend. Therefore, Tan from UOB does not expect Singapore’s domestic interest rates to follow those of the US, as the country has adopted an “appreciation stance” on its monetary policy to combat persistent inflationary pressures.