By Property Soul (guest contributor)

Recently I had an interview with Wayne Quek, Director of mortgage consultancy firm Home Loan Whiz, to understand more about how property financing and SIBOR rates work. Below is a summary of our conversation.

PS = Property Soul

Wayne = Wayne Quek, Director, Home Loan Whiz

Main factors affecting and future direction of mortgage rates

PS: Could you share with us the main factors affecting housing loan interest rates?

Wayne: There are many factors that will affect mortgage rates. I think the most significant factor at this time is the US Federal Reserve’s announcements and actions with regards to their interest rate policies.

SIBOR (Singapore Interbank Offer Rates) is heavily influenced by the Singapore-US Dollar exchange rate and also the US Federal Funds rate. Historically, there is a very strong correlation between the interest rates in Singapore and the US. We have already seen an example earlier this year when the Federal Reserve announced the end of their QE program, which led to a spike in our SIBOR from 0.4 percent all the way to 1 percent.

PS: Where do you see the SIBOR rates going in the near future? How would that impact banks and mortgage borrowers?

Wayne: If we examine the current 3-month SIBOR of 0.82 percent, it is still hovering below its long-term average. It is unlikely that the rates will increase dramatically overnight, but it most likely will increase in the next year or two. This depends very much on the actions of the Federal Reserve and MAS.

A higher SIBOR will be good news for the local banks, as they will be able to earn a much larger margin with their low cost of funds. Just think about it from the bank’s perspective: paying customers 0.05 percent interest for savings account and charging three percent for mortgage lending.

With a healthy economy and high employment rate, there should not be a huge impact on mortgage borrowers. The government has also implemented measures to curb investors’ speculation and over-leveraging, with the introduction of the Total Debt Servicing Ratio and Buyer/Seller Stamp Duties.

We might however, start seeing more defaults from over-leveraged investors, and a rise in bank mortgagee sales (or bank loan defaulted properties). This is due to a “double whammy” effect of a huge supply of residential units coming into the market and the tight foreign immigration policy, which will result in a lackluster rental market.

Options for borrowers in a rising rate environment

PS: What are the options of a borrower in the environment of rising interest rates?

Wayne: Mortgage borrowers should avoid timing the market. Be financially prepared in terms of your cash flow to handle a one to two percent increase in interest rates.

If you find that you will not be able to handle a spike in interest rates, you can consider switching to fixed rates to eliminate that short-term concern. Also, if you are on a floating interest rate, always make sure that you are getting the best spreads at any point of time. We have no control over the SIBOR, but we can better manage the spreads we pay to the banks.

PS: Under what circumstances should a borrower consider refinancing his existing housing loan?

Wayne: There are many factors one should consider when refinancing an existing housing loan. The primary reason would be to lower your interest rate spreads to save money. Most interest rate packages in Singapore tend to have teaser rates for the first few years, and spike up thereafter. I cannot emphasize the importance of doing a periodic loan review every three years.

PS: What are the key factors to consider when comparing housing loan offers from different banks?

Wayne: Key factors will differ between individuals. A person who intends to prepay needs to go for a package without lock-in. Someone who wants to do a maximum cash out might go for the bank that can support the highest valuation. A person who has not-so-good credit might want to approach a bank that is more lenient. Of course, after fulfilling all these requirements, it always comes down to interest rates which are still the main factor when comparing packages.

PS: What do you recommend borrowers do if they have difficulties passing the TDSR test in the process of refinancing?

Wayne: For borrowers who have difficulties passing the TDSR, they have to figure out the root cause of the problem and figure out how to reduce their liabilities. Is it because of their car loan? Is it because of too much personal loan and credit card expenditure? Alternatively, they can approach mortgage consultants like us to review their situation and find possible solutions and to develop an action plan.

PS: Do you see rising interest rates having a strong impact on the performance of REITs?

Wayne: Rising interest rates mean higher interest expense as most REITS have a high gearing ratio. This will affect the profitability of the REITs. However, on the other hand, when interest rates rise, it is most likely the result of an improving economy. An improving economy will lead to more jobs, higher consumer spending, which in turn leads to higher rentals. I think that rising interest rates will probably cause a short-term correction in the REITs market, especially those that are more heavily geared. This may present some buying opportunities.

By guest contributor Property Soul, a successful property investor, blogger, and author of the No B.S. Guide to Property Investment.

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