The US Federal Reserve has been hiking up the interest rates for over a month and some of the effects have been felt throughout the world. Those who invest in the US market would have noticed a drop in prices for both company stocks and index funds.
|Year||Average Yield||Year Open||Year High||Year Low||Year Close||Annualper cent Change|
|2022||0.35 per cent||0.08 per cent||0.83 per cent||0.08 per cent||0.83 per cent||1085.71 per cent|
|2021||0.08 per cent||0.09 per cent||0.10 per cent||0.05 per cent||0.07 per cent||-22.22 per cent|
|2020||0.36 per cent||1.55 per cent||1.60 per cent||0.04 per cent||0.09 per cent||-94.19 per cent|
|2019||2.16 per cent||2.40 per cent||2.45 per cent||1.55 per cent||1.55 per cent||-35.42 per cent|
|2018||1.79 per cent||1.42 per cent||2.40 per cent||1.34 per cent||2.40 per cent||80.45 per cent|
|2017||1.00 per cent||0.55 per cent||1.42 per cent||0.55 per cent||1.33 per cent||141.82 per cent|
|2016||0.39 per cent||0.20 per cent||0.66 per cent||0.20 per cent||0.55 per cent||175.00 per cent|
|2015||0.13 per cent||0.06 per cent||0.37 per cent||0.06 per cent||0.20 per cent||233.33 per cent|
|2014||0.09 per cent||0.07 per cent||0.13 per cent||0.06 per cent||0.06 per cent||-14.29 per cent|
|2013||0.11 per cent||0.09 per cent||0.17 per cent||0.06per cent||0.07 per cent||-22.22 per cent|
|2012||0.14 per cent||0.04 per cent||0.19 per cent||0.04 per cent||0.09 per cent||125.00 per cent|
Why is this so?
As many would have seen or heard, the interest rate hike’s primary motivator is due to Covid-19. The US is trying to cushion the damaging effects of Covid-19 on the economy and citizens’ income, and stimulus checks amounting to hundreds of billions of US dollars were given out. As a result, inflation is rising very quickly, causing the Feds to step in and take action.
As of now, the Feds are responding to the inflation rate and as long as there is still inflation deemed undesirable by the Feds, the interest rates will continue to rise.
How does it affect Singapore?
With the US accounting for a large portion of the world economy, Singapore will be affected by their economic movement. Though Singapore has a robust financial system in place and the central bank will monitor the situation before making any changes, the US Fed rate hike will invariably cause a shift in our interest rates as well.
The most prominent area where the rising interest rates can be felt is with home mortgage loans. With the rising interest rates, banks have to adjust what they are offering for mortgage loans as Singapore is an "interest-taker".
Singapore Overnight Rate Average(SORA) is a benchmark measurement banks use to determine the mortgage loan interest rate. We have already observed that the SORA rates have increased more than 100 per cent since earlier this year. This interest rate may rise more as the Feds are projected to raise interest rates more until the end of the year.
SORA rates are measured with a compound average of the daily SORA rates over 1 or 3 months. This means that they are relatively stable when compared to Singapore Interbank Offered Rates (Sibor).
|Jan 03, 2022||0.1416|
|Feb 03, 2022||0.3069|
|March 01, 2022||0.1873|
|01 April 01, 2022||0.4185|
|04 May 04, 2022||0.4734|
|01 June 01, 2022||0.3254|
|June 16, 2022||0.7937|
|June 17, 2022||1.2041|
As can be observed from the table above, SORA rates are rising and especially so in these few days. However, they are still below the fixed rate by around 1per cent.
Fixed rates on the other hand are higher than floating rates, but with good reason: it’s fixed for a certain period of time and will not be affected by volatility. As people are relooking at their mortgage or choosing a mortgage loan, fixed rates may present a better choice in these times of uncertainty.
However, bank analysts do mention that SORA is still significantly lower than fixed rates and there is a buffer before the prices reach the fixed-rate level.
As of now, the situation seems under control as there does not seem to be any recession. However, the future is very uncertain. There are economists who predict that there will be a high probability of recession in the coming years.
Bank interest rates will be the main concern and the bulk of it will come from the homeowners who have a mortgage loan. Seeing the SORA rates climbing steadily and fixed rates getting removed, it is indicative that mortgage rates may be rising further in the future. A recession is a major concern but analysts predict it will not be in the near future, but potentially in 2024.
Options to deal with rising interest rates
Bankers are advising the general public not to worry about defaulting on their loans. With the mortgage servicing ratio (MSR) and total debt servicing ratio (TDSR) put in place, you will have a safety net to afford the repayments should the interest rate increase.
What this means is that you simply pay off your remaining loan amount with a new loan. For example, a homeowner is 10 years into their mortgage repayment with a mortgage term of 25 years. The homeowner can choose to pay off the remaining 15 years worth of mortgage loans with another loan, meaning that they will now finance the new loan.
Mortgage refinancing can be a useful tool for homeowners to get better rates and some banks would offer attractive rewards for refinancing.
To find out more about refinancing, read here.
Switching to fixed interest rates
If you are worried about rising interest rates causing your mortgage repayments to increase, you may consider switching to fixed interest rates. Floating interest rates fluctuate with the market conditions and may rise to an undesirable level.
However, some banks have suspended mortgage loans with fixed interest rates. Check with your bank to see if they are still offering fixed rates if you wish to switch.
Debt consolidation is a process of bringing all your loans together under one umbrella so that you can enjoy lower interest rates on one big loan. There are many forms of debt consolidation services out in the market.
The most common ones come from banks, however, if you are not able to obtain a debt consolidation service from the bank, you may opt for a licenced moneylender.
Click here to find out more about which debt consolidator is suitable for you.
As all the headlines about the Fed rate hike plaster news and social media sites, it is difficult not to be worried about the future especially if you have mortgages to pay.
As long as you have enough saved and do not have loans that you are struggling to pay, you will most likely be fine. However, there are many options to lower your interest rates as mentioned above and homeowners with mortgage repayment can consider taking.