Mortgage interest rates \'will rise, but slowly\'

Economists say no need to panic as US Fed likely to raise rates only next year

The Straits Times - March 22, 2014 
By: Mok Fei Fei

Low interest rates since the global financial crisis have fuelled higher household borrowings over the past five years, particularly in home loans. -- ST FILE PHOTO

HOME OWNERS should be concerned about higher interest rates on their mortgages but there is no need to panic, say economists.

All those who spoke to The Straits Times agreed that the end of easy money policies in the United States will translate to rate hikes globally, including in Singapore.

But they pointed out that the US Federal Reserve would likely raise its ultra-low, short-term rates only sometime after the middle of next year and the hike would not be big.

Benchmark rates here like the Sibor (Singapore Interbank Offered Rate) will probably stay flat until the second quarter of next year, noted Mr Tim Condon, chief economist for Asia at ING Bank.

"Conditions in the US economy don't warrant a radical, abrupt tightening of money policy so even if interest rates are raised, it will still remain historically low," he said.

The Sibor - the rate that banks lend to each other and commonly used to set mortgage levels - is at 0.402 per cent for the three-month borrowing period.

DBS economist Irvin Seah said the Sibor has edged up, from 0.374 per cent at the end of the third quarter last year, following the Fed's warning of the tapering of its monetary stimulus.

Markets typically move ahead of policies and Fed chief Janet Yellen's announcement on Wednesday that short-term rates could be raised next year will have a similar effect.

"The days of low interest rates will come to an end eventually, so home owners, businesses and investors have to factor in the higher cost of funding," Mr Seah said.

Low interest rates since the global financial crisis have fuelled higher household borrowings over the past five years, particularly in home loans.

Problems like slower credit growth and more bad debt can crop up when the Sibor rises, said Capital Economics Asia economist Daniel Martin.

"Quite a few households that borrowed beyond their means may not be prepared for the increase in costs," he added.

Home owners deciding whether or not to refinance should not rush into things, said Smartloans.sg chief executive Vinod Nair.

Floating home loan rates, according to Mr Nair, constitute about 65 to 70 per cent of the market due to the low Sibor rate in the past few years.

He said the average floating loan rate now stands at about 1.35 per cent while the average three-year fixed loan rate is about 1.38 per cent.

Mr Nair expects floating rates to rise by some 0.4 percentage point to an average of about 1.75 per cent by the first quarter of next year.

Ms Phang Lah Hwa, the head of consumer secured lending at OCBC, said a home loan is a long-term commitment and buyers should understand the financing considerations before committing to anything.

She added that fixed-rate mortgages are good for those who want stable monthly instalments, while floating rate loans suit property owners looking to capitalise on current low interest rates.

Ms Chia Siew Cheng, head of secured lending at UOB, added that customers should set aside sufficient savings so they will not fall short of their loan commitments and will be able to maintain a good credit track record should market conditions change.

Civil servant Amirul Asraff, 26, who is applying for a new home loan, is opting for a fixed rate loan so he can lock in the low rates and not worry about fluctuations.

But banking executive Sean Heng, 30, a home owner, is sticking to his floating-rate package as he does not expect a drastic increase in interest rates.