Credit: Propnex Research
On 30 June 2022, home loan rates in Singapore have hit a new high of 3.08% after United Overseas Bank (UOB) raised its rates. The new rate applies to UOB's 3-year fixed rate package. The bank also raised rates for its 2-year fixed rate package. Singapore home loan rate have been on an uptrend since the fourth quarter of last year when 3-year fixed rates were at 1.15%.
As most of you might know, Singapore' interest rates are closely pegged to the movements of the US Fed's interest rate. So how will this hike in interest rates affect you? To better understand this, let's take a look at the types of interest rates offered here in Singapore.
Total Debt Servicing Ratio (TDSR)
Total Debt Servicing Ratio is a financial safety mechanism introduced by the Singapore Government to ensure that its people are not overleveraging and have the necessary financial capabilities to pay off their loans.
The impacts of rising interest rates
Buyers are afraid of rising interest rates because it affects the amount home buyers have to pay after calculating accrued interest from their home loans. Do you know that if you have made calculated considerations, the rising interest rate may not have such a big effect on your purchase.
A lot of us feel that it’s a bad timing to purchase a property when interest rates is increasing. Here are some examples about co-relationship between the property market and interest rates.
Reference to Figure 1, property prices have been on the rise over the past 20 years. In fact, since 2010Q1, interest rates have been relatively flat except for 2015Q1 when they started surging and then declining again when the COVID pandemic occur.
Figure 1: PPI vs Interest rates (2002Q1 to 2021Q3)
Does it mean that for those property owner who bought properties between 2015Q1 and the pandemic suffered losses when the interest rates flattened over the last 2 years? You will be very surprised to find out that not only did they not suffer a loss, but many buyers made profit.
For example, during the interest peak in 2018, property owners who bought Twin Vew, managed to make a profit close to half million when they sold it in 2021. See Figure 2.
Figure 2: Historical transactions for Twin Vew
Mortgage interest rates may be one of the considerations you have when purchasing a property. The case study above illustrates that rising interest rates did not hinder the growth of a well-planned and selected property.
Here's another example - Treasure @ Tampines in Figure 3 below, the unit that transacted when the interest rates were high in 2019Q2, managed to make a profit of $416,000 in just slightly less than 3 years.
Figure 3: Historical transactions for Treasure @ Tampines
The Effect of Interest Rates on Inflation and Recession
Whenever interest rates are rising or falling, you commonly hear about the federal fund rates. This is the rate that banks use to lend each other money. It can change daily, and because this rate's movement affects all other loan rates, it is used as an indicator to show whether interest rates are rising or falling.
These changes can affect both inflation and recessions. Inflation refers to the rise in the price of goods and services over time. It is the result of a strong and healthy economy; however, if inflation is left unchecked, it can lead to a significant loss of purchasing power.
As higher interest rates mean higher borrowing costs, people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall.
What's next?
The rising interest rate should not be view as a doom for the property market. In fact, we should embrace it as one way of curbing runaway prices and promoting financial prudence amongst consumers/mortgages.
Interest rates do not stay constant. Hence there are always opportunities for property buyer to benefit from either the rates or prices, depending on whether the direction that it is moving it to your advantage. More importantly, property buyer must be clear and realistic about their financial position and financing capabilities.
I love to share with you some tips when choosing the right property to purchase. Let's meet and eat cake!
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