Impact Interest Rate Cuts Home Loans Good Time Refinance

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In recent news, US Federal Reserve chair Jerome Powell has indicated a possible interest rate cut, raising expectations for a rate cut at the next Federal Open Market Committee meeting in mid-September. However, the extent of the first rate cut and its subsequent trajectory remain uncertain, according to Jacquelyn Tan, UOB’s head of group personal financial services.

Singapore’s interest rate movements have usually mirrored those of the US, says Clive Chng, associate director at Redbrick Mortgage Advisory. This means that when US interest rates change, Singapore’s rates and mortgage rates tend to follow suit.

Interest rates in Singapore have already been declining in recent months in anticipation of US interest rate cuts, notes Chua Hak Bin, regional co-head of macro-research at Maybank Investment Banking Group. He expects mortgage rates to continue to fall as the Fed eases its monetary policy and cuts interest rates.

Mortgage rates, especially for fixed-rate mortgages, have already decreased, with two-year fixed-rate mortgage packages available at around 3%. The three-month Singapore Overnight Rate Average (Sora), which is used by local banks for floating mortgages, has also decreased. At the start of January, Sora was at 3.701%, and as of Aug 28, it stood at 3.572%, according to the Monetary Authority of Singapore.

Chua from Maybank expects the three-month Sora rate to reach 3.4% by the end of the year. He forecasts a cumulative 50 basis point rate cut by the end of 2024. He also estimates that the three-month Sora rate could drop further to 2.7% by the end of 2025.

Taking advantage of the downward trend in interest rates

Chua believes that homeowners should seize the opportunity to refinance their existing mortgages while interest rates are low. However, he warns that some homeowners with a mortgage pegged to the Singapore Interbank Offered Rate (Sibor) may face a “sticker shock” due to the transition to Sora, which will replace Sibor after Dec 31. This is because Sora tends to be higher than Sibor.

Chua advises homeowners in this situation to review and seek out more attractive mortgage deals. He believes that both new and existing homeowners in Singapore will benefit from the lower financing rates.

Those with an outstanding mortgage loan should stay flexible and avoid locking themselves into a loan package, especially when interest rates are expected to decrease, adds Lee Sze Teck, senior director of research and data analytics at Huttons Asia. He suggests considering a variable rate package with a one-year lock-in period.

Lower interest rates will also affect the loan amount that a homebuyer can qualify for. Most banks use Sora + 1% as the interest rate in their stress tests. Buyers with a combined monthly income of $16,000 and a 30-year loan tenure can borrow up to $1.7 million. If the stress test interest rate is reduced by 50 basis points, the loan amount will increase by $100,000 to $1.8 million (see table below).

Reprice or refinance?

Some homeowners may consider repricing or switching to a new loan package with the same bank, but there may be repricing fees involved. Others may opt for refinancing by switching to another bank offering a more preferable home package.

Refinancing offers homeowners an opportunity to optimize their mortgage terms, possibly lower their interest rates, and enjoy lower monthly installments, says UOB’s Tan. She adds that it also allows homeowners to change their loan type and features to adjust to changing market offerings and trends.

However, there are additional costs involved in refinancing and switching to another bank, such as legal fees, valuation fees, prepayment penalties, or clawback of subsidies, warns Tan. Homeowners should calculate whether the total costs outweigh the potential savings from refinancing.

Certain home loans may be part of a package with savings and credit cards, notes Huttons’ Lee. He emphasizes that switching to another bank may result in the loss of the higher interest on the savings account.

Fixed-rate loans are more competitively priced

According to UOB’s Tan, fixed-rate loans have generally been priced more competitively than Sora-pegged loans over the past year, and this trend is expected to continue into 2025.

At OCBC, there are one-, two- and three-year fixed-rate mortgage packages, as well as floating rate packages pegged to the three-month Sora. “The two-year fixed-rate package remains the most popular, and it is priced approximately 0.35% lower compared to a year ago,” says Maryanne Phua, head of home loans at OCBC.

At Redbrick Mortgage, Chng has noted some banks offering free conversion between fixed and floating rates after a year or a one-year fixed interest rate with a two-year lock-in period. This allows homeowners to switch to a variable interest rate package in the second year.

In order to stay competitive, some banks may also offer fully subsidized valuation and legal fees for those looking to refinance, according to Huttons’ Lee.

Interest rates in Singapore are not expected to significantly decline. Chng of Redbrick Mortgage says, “Unless there is a recession, we expect interest rates to see a gradual downward movement.” With Singapore adopting an “appreciation stance” on its monetary policy to combat persistent inflation, UOB’s Tan does not expect domestic interest rates to decrease in line with US interest rates.