Repayment's tight as Sibor bites

He took out loans and mortgaged his three-bedroom condominium unit to invest in property overseas, thinking that he could get rich quick.

But Mr Lim ended up over $600,000 in debt and with a $400,000 mortgage when the overseas developer went missing in 2011.

Two years ago, Mr Lim approached Credit Counselling Singapore, which helps people with debt problems. They helped him negotiate a monthly payment plan of $8,000 to creditors for a term of seven years to pay off his debt.

Mr Lim is also servicing a mortgage of about $2,200 at an interest rate of around 1.8 per cent. Mr Lim's family of four live on a tight budget and an increase in mortgage rates is the last thing they need.

But following the United States' Federal Reserve's decision to raise interest rates last month, home loan and mortgage rates in Singapore are also set to rise. (See report below.)

Home loan and mortgage rates are usually based on the Singapore Interbank Offered Rate (Sibor), which moves in tandem with US interest rates.

"I hope the increase (in interest rates) is not steep, one per cent a year is still all right and we can stomach that," said Mr Lim.

"But if it's three per cent... I will probably have to ask my children to chip in more."

Mr Lim's two older children are working and help shoulder about 35 per cent of the household monthly expenditure.

Mr Lim declined to reveal his salary, but said he is only able to make the various bill payments with the help of his children.

His youngest child will complete her university education this year and he hopes that she, too, will be able to help out financially when she enters the workforce.

He said: "I'm their father, I will feel bad asking them (to contribute more money) for this mistake. Our budget is very tight and we're already stretched to the limit. We have already cut down to the bare bones, no restaurants, less entertainment and less shopping."

Four things home owners should know

Home owners with existing loans pegged to the Singapore Interbank Offered Rate (Sibor) are likely to find themselves paying more for their mortgages in 2016, said housing and financial experts.

Most housing loans are set at a certain percentage above Sibor and a rising Sibor rate will equate to an increase in interest payments, said Mizuho Bank's senior economist Vishnu Varathan.

He said that because Sibor moves in tandem with United States interest rates, the US Federal Reserve's announcement last month that it would increase interest rates by 0.25 to 0.5 per cent will definitely affect Singapore's interest rates.

Mr Varathan predicted that Sibor will increase by about 0.75 to 1.25 per cent more than prevailing rates over the course of this year.

So what should home owners here know about the increase in Sibor and what can they do to mitigate it?

DON'T PANIC

Sibor has been increasing gradually over the past year and the US Federal Reserve announcement has been a long time coming, said ECG Property chief executive Eric Cheng, 40.

Mr Cheng said that although home owners will be paying more for their loans and saving less, the interest rates are still fundamentally stable.

"It's a gradual and progressive increase in interest rates, so if you're a prudent investor and you have planned well, you'll be able to handle the increase," he said.

The increase in interest rates is a "normalisation and not a hike", said a spokesman from SRX Property .

"Interest rates have been very low for too many years, so this increase is actually allowing rates to go back to normal," he said.

LOOK FOR REFINANCING OR REPRICING ALTERNATIVES

Home owners should look for alternatives to their current home loan packages, said Mr Ong Kah Seng, director of property market research company R'ST Research.

"They should research and find alternatives and other resources," he said.

"It's good to know the options, because switching interest rate packages or refinancing might not always be the best choice.

"Sometimes, sticking to their current loans will be better."

Mr Ong said that home owners should take this as a chance to become more informed about their loan options as "it's a danger to be a passive home owner".

DON'T INVEST BEYOND WHAT YOU CAN

Everyone will eventually be affected by the interest rate increase, but investors who do their numbers well won't be as severely affected.

"Those who are most affected by the Sibor increase are those heavily geared or invested in property," said Mr Cheng.

"They may have taken loans larger than what they can finance."

Property investment blogger and founder of Property Club Singapore, Ms Vina Ip, advised home owners to consider multiple factors of their property investments.

A combination of factors such as market oversupply, a lucklustre rental market and high vacancy rate can result in more mortgage defaults, she said.

BE FLEXIBLE

To mitigate the increase in Sibor, investors with vacant properties should be more flexible.

With the dismal rental market, they should lower expectations for rental fees and tenants' profiles, said Mr Ong. Any rental can help negate the increase in Sibor.

He said: "Their top priority should be to get tenants to fill up the space for at least one or two years."

tammei@sph.com.sg

This article was first published on January 4, 2016.
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