Are you a homeowner with a floating rate home loan? Like it or not, both SOR and SIBOR home loan packages will be affected with increases in the United States Federal Reserve funds rate. Back on 14 December 2016, the Federal Open Market Committee increased the US Fed funds rate by 25 basis points to between 0.5% and 0.75%, with a projection of three gradual rate hikes for 2017.
True to the Committee's words, on 15 March 2017, the Committee proceeded with the first anticipated rate hike for 2017 which brought the US Fed funds rate to a target range of between 0.75% and 1%, thanks to the realized and expected strengthening US labour market conditions and inflation in the United States. Interested to find out how the rate hike could affect home loans in Singapore? We at GET.com share with you our two cents' worth below.
How The Fed Rate Hike Could Affect Home Loans In Singapore
1. SIBOR And SOR Should Trend Upwards
For those who don't know yet, SOR rates and SIBOR rates move in tandem with the US Fed funds rate although SIBOR rates tend to be more stable compared to SOR rates.
At least in the near-to-medium term, we would expect local benchmark interest rates SIBOR and SOR to correspondingly trend upwards. And that just means that your cost of borrowing is going to increase. So, if your home loan is pegged to SIBOR or SOR, you would expect to pay more in monthly installments as interest rates rise.
2. Think Farther: Expect Gradual And Multiple Rate Hikes
The 0.25% Fed funds rate hike that's just been announced was done within the first quarter of 2017. It sends a strong signal that the Fed is committed to its stance on doling out multiple, gradual interest rate increments in the near future.
This move is in stark contrast to the one and only rate hike seen only at the end of 2016 despite the Fed's previous indications of 4 quarter-point increases in 2016.
At the moment, the Fed has left its forecast for the Fed funds rate consistent with two more 0.25% increases projected for 2017; and three more for 2018.
3. Don't Discount Fixed Rate Or Fixed-Deposit Pegged Home Loans Just Yet
No matter whether you are an existing or prospective borrower, if you are looking for a suitable home loan package, maybe you'd want to expand your options.
Based on our observations, both fixed rate and fixed-deposit pegged home loans have remained relatively popular among borrowers in the past few months as more and more banks are offering such loans at competitive spreads to attract borrowers.
These home loans are considerably less volatile than those pegged to fluctuating interest rates. Therefore, they provide for greater certainty in monthly repayments compared to those that are pegged to SIBOR or SOR.
4. Ask Yourself If Refinancing Is A Viable Option
Although the projected long-run Fed funds rate is to be at 3% by the end of 2019, and the projected rate by the end of 2017 is 1.5%, know that the definite path of the Fed funds rate will still depend on the economic outlook as informed by up-to-date data.
Given the prospect of climbing interest rates, it would make sense for existing homeowners, who are currently holding on to SIBOR/SOR-pegged loans and are eligible for refinancing, to assess and review their home loan options. It would be prudent for homeowners to mitigate potentially higher interest payments over the next few years, no?
Besides considering refinancing your floating-rate home loan to a fixed rate or fixed-deposit home loan as mentioned in the point above, you can also take a look at home loan packages pegged to longer interest rate term such as the 12-month SIBOR instead of the more common 3-month SIBOR, for more certainty in the applicable interest rate.
Alternatively you could consider a loan that comes with the flexibility to switch across different SIBOR tenures. There are also home loans without a lock-in period, by the way.
So, what now? You can easily compare home loans to find the cheapest home loans in Singapore here at GET.com.