The three-month Singapore Interbank Offered Rate (SIBOR) continued to push higher on Monday (Feb 2), touching 0.67863 per cent.
SIBOR is a key interest rate that housing loans in Singapore are pegged to and it has been on an upward trend since the end of last year.
Expectations are that home buyers may have to service higher monthly mortgages, and industry watchers have said this could reduce household disposable income.
Most homebuyers take housing loans of 25 years and these are mostly pegged to SIBOR. So as the benchmark climbs, so will mortgage payments.
SIBOR has remained low in recent years but since the start of January, it has jumped by about 50 per cent. The three-month SIBOR is now at its highest in more than six years, and is almost double from what it was at its lowest – around 0.344 per cent – in 2011.
Mortgage rates have also started to climb and are now between 1.5 and 2 per cent, or almost double from a low of 1 per cent about three years ago.
Industry watchers said home buyers could start to feel the pinch. But some are already taking measures to mitigate the impact.
“For a S$500,000 loan at 25 years, you used to pay 1 per cent. Now it is 2 per cent. You will see an increment of S$250 a month. Likewise, a S$2 million loan would see a S$1,000 increment per month. This may affect household affordability,” said Ms Maggie Ang, a mortgage consultant at FindaHomeLoan.
“When cost was low, home buyers opted for floating rates rather than fixed rates. The premium of fixed rates over floating rates was 20 to 30 basis points higher. So it was not worth it to take the fixed rates then. Now the market has changed, customers are considering fixed rates over floating rates to hedge against rising rates.”
The Monetary Authority of Singapore has warned against the impact of rising interest rates. In 2013, it estimated that up to 10 per cent of borrowers were overstretched, and those “at risk” might rise up to 15 per cent if mortgage rates climbed three percentage points.
Industry watchers said owners of multiple properties are likely to be most affected as they would have to service higher mortgages amid slowing rental income. According to data by the Urban Redevelopment Authority, rentals of private residential property fell by 3 per cent.
Mr Sumit Agarwal, Low Tuck Kwong Professor of Finance at NUS Business School, said: “The bigger effect will be on these investors, because they are already overstretched. The underlying thought they have is that the debt service burden is low right now and they have cash to buy these second or third houses, and they expect house prices to go up.
“We already know house prices are softening, rents are softening. And if interest rates go up, that affects them in both directions. This will cause them either to stop making these debt service payments, default on these second properties. And that can have macro-economic effects because once they default, it depresses the property prices in the neighbourhood. That would have an effect on the existing home buyers who live there.”
Still, property consultant Colliers International has said that interest rates are expected to remain low for now. Furthermore, analysts said that for the next five years, rates are unlikely to return to pre-crisis highs.
Source : Channel NewsAsia – 2 Feb 2015