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The Impacts of Rising Interest Rates on Property Investment

The Impacts of Rising Interest Rates on Property Investment

Singapore has been enjoying a low interest rate environment since 2008 but such low rates cannot remain forever. To allay concerns and to encourage prudent lending and borrowing for the long-term, the Monetary Authority of Singapore (MAS) introduced the Total Debt Servicing Ratio (TDSR) framework back in June 2013.

Interest rates may be rising, but first, let's examine what influences Singapore's interest rate movements:

Unlike most economies around the world, Monetary Authority of Singapore (MAS) uses the exchange rate policy to combat inflation. As Singapore imports everything, including raw materials, for export, a strong Sing Dollar is generally good. As such, the Singapore Inter-Bank Offer Rate (SIBOR) and Swap Offer Rate (SOR) is based on a market mechanism which generally follows the direction of the US Federal Funds Rate. As the US has been maintaining a near zero interest rate policy as part of their unconventional monetary policy since the global financial crisis, our SIBOR has remained low.

Focusing on the 3-Month (3M) SIBOR – the reference most home owners use as basis for their home loan – the Federal Funds Rate and Singapore's 3M SIBOR have historically had a strong correlation. Over the past 6 years, the Federal Funds Rate has been at all-time lows, close to 0%, and Singapore's 3M SIBOR has followed suit, ranging between 0.3% - 1%.

SIBOR-3M-vs-Federal-Funds-Rate

Source: MAS, FRED, ABS

However, with the Feds likely to start raising the Federal Funds Rate by the middle of this year, a wave of worry has risen amongst Singaporean property investors who have their home loans pegged to the 3M SIBOR.

Already, even when the Federal Reserve Rate remained unchanged, the SIBOR has spiked up by more than 50% in a month. The volatile currency market, which influences fund movements, caused the recent jump in SIBOR from 0.41% to 0.64% in January 2015. The SIBOR as of 27 February 2015 is around 0.77%.

On 28th January 2015, the MAS unexpectedly announced the easing of its monetary policy to a modest and gradual appreciation of the S$NEER policy band.

While the market expects the US to gradually raise their rates, we can't take it for granted that SIBOR won't spike up due to other factors.

After understanding interest rates, let's examine the impact of rising interest rates on home loans:

Loan Package

The illustration above shows the increased burden for an individual who has taken a loan of $800,000 for a tenure of 25 years. The 3M SIBOR rates increase annually by 0.5% till an assumed 2.5%.

Loan Package

Monthly instalments increase every year and by the 6th year, the borrower's monthly instalments would have increased by 19.33%.

Homeowners who bought a property after 29th June 2013 can now appreciate the TDSR framework, as it came into effect. To encourage prudent borrowing and to prevent over-exposure in a rising interest rate environment, an interest of 3.5% is considered when applying for loans instead of the lower mortgage rates. Instalments derived from this rate of 3.5% cannot exceed 60% of monthly income minus any monthly payments to other credit facilities. Larger amounts of cash outlay are required, and this has reduced the ease of purchasing homes. Having such tougher assessment criteria allows for peace of mind in the near future. As the saying goes, better to be safe than sorry.

However, this framework only applies to those who purchased properties on or after 29 June 2013. Individuals who bought properties prior to that are encouraged to perform a mortgage stress test on their loans in the face of rising interest rates.

Those who are highly leveraged are advised to have financial health check to evaluate their overall financial situation. In evaluating an appropriate loan package for their mortgage needs, they may also consider a fixed rate package based on the period that the bank can offer. They should also balance the need to make a partial repayment of their loan to reduce the loan interest, if it is possible.

During the financial health check, borrowers can also assess their mortgage insurance for protection on death, disability and critical illness.

A final resort, if borrowers find that they are overly leveraged, would be to sell their properties before interest rates spike up further.

To have a thorough financial consultation, and make the best of all situations, do contact a professional financial advisor.

Contributed by:

Alfred Chia C K BSc, CFP, FChFP, ChFC, SAMP
Chief Executive Officer

SingCapital Pte Ltd (An MAS-Licensed Financial Adviser)

Email: alfredchia@singcapital.com.sg

Author of 'Mortgage and Grow Rich' and 'Grow Rich Singapore Style'

Disclaimer
Do note that while every reasonable care is taken to ensure the accuracy of information printed, no responsibility can be accepted for any loss or inconvenience caused by any error or omission. The idea, suggestions, general principles, examples and other information presented here are for reference and educational purposes only, and are not meant to be a substitute for professional investment advice. Please consult a qualified financial consultant for a plan specific to your needs. The author shall have no liability for any loss or expense whatsoever relating to investment and financial decisions made by the reader.

Alfred Chia
Alfred Chia

Alfred Chia BSc, CFP, FChFP, ChFC, SAMP
CEO, SingCapital Pte Ltd

Alfred is the CEO of SingCapital which is a Financial Advisory firm licensed by Monetary Authority of Singapore (MAS). Please visit www.singcapital.com.sg for more information. He has more than 22 years of experience in the financial advisory field serving both Individuals and Corporations.

He also serve as a non-executive director for Real Estate Funds.

Graduating from the National University of Singapore, Alfred also holds professional qualifications – Certified Financial Planner (CFP), Fellow Chartered Financial Planner (FChFP), Chartered Financial Consultant (ChFC) and Singapore Accredited Mortgage Planner (SAMP).

As an ardent believer in the power of education, Alfred strives to share his knowledge through as many conduits as possible. He is the Creator and Chief Trainer for the popular program, 'Singapore Accredited Mortgage Planner', for real estate and financial professionals. Alfred is also a lecturer for Chartered Financial Consultant (ChFC), a professional course for the financial practitioners industry.

This passion to share has also prompted Alfred to author 2 books, ‘Mortgage and Grow Rich’ and ‘Grow Rich Singapore Style’. The books are dedicated to holistic financial planning towards financial well beings.

For enquiries, please contact:
Alfred Chia
94554829 (Mobile No.)
alfredchia@singcapital.com.sg
www.singcapital.com.sg