How interest rates affect the property market in Singapore
Home Central Analysis: Interest rates and its impact in 2021
With the recent news of a strong economic recovery in the US, Singapore’s economy is also expected to bounce back from 2020. In 2020, Singapore’s economy has declined by 5.4%. This year in 2021, MAS forecasted to be more than 6% growth.
Interest rates & risks
Earlier than expected growth coupled with Singapore’s interest rates likely to be in tandem with that of the US, would mean that interest rates will rise. This rise in interest rates should be taken into account when purchasing a property in Singapore as a rise in interests rates would potentially increase debt servicing costs.
While MAS analysis showed that the median household's mortgage servicing ratio would remain manageable even under a stress scenario of a 2.5 percentage point increase in mortgage rates and a 10 per cent drop in income, home ownership and mortgage servicing remain significant concerns among young Singaporeans. CBC's Financial Wellness Index 2020 says that 55% of millennials (aged 21-39) are worried about not being able to afford a house for their own stay. 38% within this age group who already have mortgages have difficulties paying their loans on time.
Thus, home buyers during this period should expect the rise in interest rates and consider their financing abilities properly before purchasing a property.
Floating VS Fixed Rates
Those concerned with rising rates could consider fixed rate packages, which offer a flat interest rate, usually for up to three years as compared to floating rates (fluctuating interest rates). While floating rates are usually lower compared to fixed rate packages (meaning paying a lower monthly instalment they also bear the risk of interest rates increasing). Do consider your risk appetite and financing ability before deciding on a floating or fixed rate loan for your property.
How Does Fixed Rates & Floating Rates Work?
Home loans are priced at fixed interest rates or floating interest rates. Fixed rate mortgage loans charge you a fixed interest rate for up to 3 years, though a small number of home loans only do this for 1-2 years. After the 3rd year, banks start charging you a floating rate. Floating interest rates fluctuate regularly because they are pegged to pre-designated reference rates like SIBOR, SOR and fixed deposit rates. Therefore, if the market interest rate continues to rise when you have to pay a floating rate, your monthly instalment will also increase.
Rising Interest Rates
Thus, in the current situation of interest rates being likely to rise, a fixed rate loan can be considered when financing your property. Although fixed rates tend to be higher than floating rates, in the event that there is a sudden increase in rates over the next 3 year period, you will be saving much more than taking on a floating rate.
To illustrate, consider this scenario:
You have the option to choose between 1% floating rate now or 1.5% fixed rate with a lock-in period of 3 years. Soon after you decided on choosing the 1% floating rate, interest rates started to soar to 2%. You are now paying 2% instead of the 1.5% fixed rate you would have paid if you decided on the fixed rate.
How this might affect property market
As interest rates rise, the demand and ability to purchase a property in Singapore is much lesser. For real estate investors, this can be seen as a positive thing as the market for rental properties will increase because fewer people can qualify for mortgages. That said, rising interest rates reduce prices, so it can sometimes be better to buy during a rising interest rate environment.
Moreover, as interest rates rise, fewer real estate transactions will take place since lending standards will be tighter. Thus, more people will need rental properties until they can afford a mortgage.
Rising interest rates do have a very noticeable effect on buyers and sellers. However if the economy grows fast enough, rising mortgage rates will not have as great an effect on property value and housing prices. A strong economy allows employers to increase salaries enough to help compensate for the rising interest rate. As long as the economy continues to grow, and we continue to see job growth and wage growth, a rise in interest rates should not paralyze the housing market.
While there are many other factors to consider when purchasing a property, taking note on interest rates and making the best decision for your circumstances to save money is ultimately the most important. While a rise in interest rates is not a big concern for those who are on fixed rates loans, it is good for prospective home buyers to consider these rates when making a decision. Generally speaking, it is fine to purchase a property in the midst of rising interest rates as the current rates are still considered to be very low. It is unlikely to see a huge spike in interest rates as that can be quite damaging to the economy.
Thus, if you would like to know more about how you can better finance your property or have any questions regarding the real estate market, do contact us for more information.