Impact Interest Rate Cuts Home Loans Good Time Refinance
One of the world’s leading financial hubs, Singapore, may see a possible cut in interest rates as announced by the US Federal Reserve chair Jerome Powell on Aug 23. This statement has led to speculations of an interest rate cut at the next Federal Open Market Committee meeting in mid-September. However, the head of group personal financial services at UOB, Jacquelyn Tan, believes that the extent of the first rate cut and its future trajectory remains uncertain. Clive Chng, the associate director at Redbrick Mortgage Advisory, suggests that interest rate movements in Singapore have historically mirrored those of the US, meaning that a drop in US interest rates will lead to a decrease in Singapore interest rates and mortgage rates as well.
Maybank Investment Banking Group’s regional co-head of macro-research, Chua Hak Bin, highlights that mortgage rates in Singapore have already started falling in anticipation of US interest rate cuts. He expects this trend to continue as the Fed eases monetary policy and cuts interest rates. Fixed-rate mortgage rates have already dropped to almost 3%, and the three-month Singapore Overnight Rate Average (Sora), which is the benchmark used by local banks for floating mortgages, has also declined. Based on the Monetary Authority of Singapore’s rates, Sora was 3.701% at the beginning of January and currently stands at 3.572%. Chua predicts that it could decrease even further to 3.4% by the end of the year, and estimates a total Fed rate cut of 50 basis points (bps) by the end of 2024. He also believes that the three-month Sora rate could potentially drop to 2.7% by the end of 2025.
With the interest rate trend looking favorable, Chua advises homeowners to take advantage of the lower rates by refinancing their existing mortgages. He cautions that those with mortgages pegged to the Singapore Interbank Offered Rate (Sibor), which will be discontinued after Dec 31, might face a slight shock as Sora tends to be higher than Sibor. Thus, he suggests reviewing and searching for better mortgage deals to cope with the transition to Sora.
Lee Sze Teck, the senior director of research and data analytics at Huttons Asia, reveals that a lower interest rate will also impact the loan amount a homebuyer can qualify for. As most banks use the Sora + 1% as the interest rate in a stress test, a drop in the interest rate will result in an increase in the loan amount that buyers can secure. Hence, those with an outstanding mortgage loan might want to consider a variable rate package with a one-year lock-in period.
Homeowners who prefer not to refinance and are comfortable with their current bank may consider repricing or switching to a new loan package. But according to UOB’s head of home loans, Maryanne Phua, repricing fees may apply. She clarifies that this method will help homeowners optimize their mortgage terms, lower interest rates, and enjoy manageable monthly payments. However, switching banks may incur additional costs such as legal fees, valuation fees, prepayment penalties, and clawback of subsidies. Therefore, homeowners should compare the additional costs to potential savings before making a decision.
As fixed-rate loans are more attractively priced than Sora-pegged loans, UOB’s Tan believes that this trend will continue till 2025. OCBC offers one-, two- and three-year fixed-rate mortgage packages and floating-rate packages pegged to the three-month Sora. The two-year fixed-rate package is the most popular, and it is priced 0.35% lower than a year ago, according to the head of home loans at OCBC, Maryanne Phua. Chng notes that some banks offer a free conversion between fixed and floating rates or a one-year fixed interest rate with a two-year lock-in period that allows homeowners to switch to a variable interest rate package in the second year. Huttons’ Lee adds that due to the competitive loan environment, some banks may offer fully subsidized valuation and legal fees to refinance applicants.
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However, Redbrick Mortgage Advisory’s Chng believes that interest rates in Singapore are unlikely to decrease significantly unless there is a recession. He predicts that, with Singapore adopting an “appreciation stance” on its monetary policy to counter inflationary pressures, interest rates will decline very slowly and may not be in sync with US interest rates.
