Rising interest rates: How will they impact your home loan?

Updated from : The Straits Times, 18 Apr 2022

Interest rates in the United States are set to go even higher – from the current 0.25 per cent to 0.5 per cent range – and this will have some impact on home mortgage rates here.

The Singapore Overnight Rate Average (Sora) is now the main benchmark for mortgages.

Sora is published by the Monetary Authority of Singapore and based on data of actual transactions in the interbank market.

Ms Maryanne Phua, head of home loans at OCBC Bank, said Sora packages are priced using the compounded average of the daily Sora rates over one or three months.

Because of this, interest rates tend to be less volatile than Sora’s predecessor, the Singapore Interbank Offered Rates (Sibor), she noted.

The rise in Sora may not be as fast as Sibor, but Sora rates are definitely going up, after lagging Sibor and fixed rates.

One-month Sibor is at 0.67 per cent, while the three-month Sibor is at 0.86 per cent.

One-month compounded Sora is at 0.3949 per cent as at April 14, and the three-month rate is at 0.2978 per cent.

The rates on fixed rate loan packages have started creeping up since the fourth quarter of last year.

For those looking to buy a property or able to reprice or refinance existing home loans, they will need to ask themselves: Should they take up a fixed rate or floating rate loan?

Some will go for a fixed rate package because it offers certainty in an environment of rising interest rates.

Furthermore, fixed rates have not reached the highs they touched in 2019, when they went up to 2.8 per cent.

Fixed rate packages are becoming limited though.

Some banks, such as Standard Chartered Bank and Maybank, have already withdrawn them.

Speaking to The Straits Times, Mr Clive Chng, associate director of mortgage broker Redbrick Mortgage Advisory, said that back in 2018 and 2019, when interest rates were going up, all the banks still offered fixed interest rates, but not this time around.

For those who can accept a little uncertainty, he advises them to go for a floating rate package.

After all, the rates are still relatively low, at around 1 plus per cent.

So, even if rates move up, this situation is still better than being in a fixed rate loan.

“If you have a million dollar loan, and the difference is going to be 80, 90 basis points, that is going to be $8,000, $9,000 of interest savings,” Mr Chng said.

Besides floating rates pegged to Sora, there are packages tied to board rates such as fixed deposit rates.

Ms Jacquelyn Tan, head of group personal financial services at UOB, cautions that such board rates are less transparent, unlike Sora.

She added that when market interest rates move, board rates may not do so in the same magnitude, as they are subject to the banks’ review.

The three Singapore banks have fixed and floating rate packages.

DBS and UOB said their fixed rate packages are more popular while OCBC noted that its one-month compounded Sora package is more well received.

The banks have also come up with hybrid packages that offer flexibility to move between fixed and floating and vice versa.

DBS has one such package, called DBS Two-in-One Home Loan.

Mr Nelson Neo, head of home financing solutions at DBS Consumer Banking Group, said it allows customers to better manage their interest expenses.

There is another loan package offered only by the foreign banks – StanChart, HSBC and Citibank.

Known as an interest offset account, clients put deposits with the bank and earn interest, which matches the mortgage interest rate.

In StanChart’s MortgageOne package, for example, two-thirds of the deposit will enjoy the same interest rate as the mortgage loan. The remaining one-third will earn 0.25 per cent per annum.

A StanChart spokesman said: “Any excess interest earned will be used to reduce the outstanding loan principal.”

MortgageOne is available only for private residential properties, and the minimum loan size is $100,000.

But, while there are a variety of loan options to tap, Mr Paul Wee, vice-president of fintech at PropertyGuru Group, said: “The issue isn’t really about interest rates, but what it means for cash flows. The question is about how to manage the higher monthly instalments. Consumers should be reviewing their options to manage this risk.”