Will Singapore Home Loan Interest Rate reach 6% in 2023?

Interest Rates On The Rise: Forecasting Mortgage in Singapore and What Home Owners Need To Anticipate In The Near Future

As we've seen recently, the rate of inflation has risen, meaning that the days of low mortgage rates are numbered. So, if you're thinking about buying a house soon, now might be a good time to start looking. Or is it?

The property market in Singapore hit a three-year high despite economic chaos triggered by pandemic. Sales quickly rebounded with restrictions during COVID 19 lockdowns in both the private and publish housing sectors. This phenomenon has seen home prices shooting up (The number of Million-Dollar HDB flat transactions has reached an all-time high in 2022.) which some experts call "a real estate bubble."

As we've seen before, interest rates tend to rise during recessions. However, they're likely to continue rising for some time after the recession ends.

Rising interest rates mean that Singapore homeowners will face larger mortgage payments. If the rise of interest rates continue, they may affect your plans to purchase a new house next year in addition to the recent cooling measures (30th Sept 2022)

UK & US Interest Rates Exceeding 6% in Recent Months:How This Will Impact Singapore In Turn

Forecasting Mortgage in Singapore

Despite the global economic slowdown, Singapore’s buoyantly performing property market has largely defied a drop in demand from overseas buyers.
Singapore house prices continued their upward trend in the third quarter despite fears of rising mortgage rates. Property prices increased by 13.2 percent from last year, according to the latest figures released by the Urban Redevelopment Authority (URA).

This is in contrast to home prices in Australia that have fallen for eight consecutive months, while New York City’s real estate market has been hit hard by the Federal Reserve’s decision to raise interest rates.

As global rates continue to rise, borrowing cost in Singapore continues to surge. The three-months' average Singapore overnight rate, which banks use to set mortgage lending interest rate, has risen to about 2%. 

It is important for us to understand that the US Federal Reserve (Fed) has plans to further raise its benchmark rate in the future, but not at an aggressive rate. For those who are paying off their mortgages, you've probably noticed that your mortgage payments have increased.

Some financial institutions in Singapore have temporarily removed fixed rate home loans for a 'wait-and-see' approach. (DBS have since raised their fixed mortgage interest to 3.5% which earlier this year, homeowners were paying as low as 1.65%). With this action, it’s no surprise that financial institutions anticipated interest rates will go even higher for the following year to five years, the time frame during which the increase is anticipated. 

As other countries' interest rates begin to rise, Singapore must take care to not fall behind by implementing measures which could make housing unaffordable for new buyers. Next year, when those same interest rates are forecast to be between 4.5% and 5%, inflated domestic property prices could become risky.

Reasons To Hit 6%

The last time mortgage rates hit 6% In Singapore is during the 2008 financial crisis.

Historically interest rate in the United States averaged 5.43 percent from 1971 until 2022, reaching an all time high of 20 percent in March of 1980. Current US Interest rate is at 6.89%

How does the US Fed affect the SORA and SIBOR?

Whenever there's an upcoming Fed interest rate hike in the near future, both the SIBOR and SORA will attempt to predict interest rate movements, and fluctuate more drastically than usual. 

Further Increase in interest rates expected to combat inflation

First we need to understand the fundamental of the relationship between Inflation and Interest Rates.

The Fed will raise interest rates as far as 4.6 percent by 2023 before stopping its efforts to combat rising inflation. The Federal Reserve raised its benchmark interest rate for the third time this year, increasing them by 75 basis points to a target of between 3 percent and 3.25 percent.

The median forecast also showed that central bank officials expect to hike rates to 4.4% by the end of 2022. With only two policy meetings left in the calendar year, chances are the central bank could conduct another 75-basis-point rate hike before the year-end.

The series of big rate hikes are expected to slow down the economy. The Summary of Economic Projections from the Fed showed the unemployment rate is estimated to rise to 4.4% by next year from its current 3.7%. Meanwhile, GDP growth is forecast to slump to just 0.2% for 2022.

With the aggressive tightening, headline inflation, measured by the Fed’s preferred personal consumption expenditures price index, is expected to decline to 5.4% this year. The gauge stood at 6.3% in August. Fed officials see inflation eventually fall back to the Fed’s 2% goal by 2025.

The European Central Bank (ECB ) has less room for maneuvering because of the weaker economic situation in Europe. Therefore, rate increases may be off the table this year, but they could return next year if the economy continues to deteriorate.

Russia-Ukraine War & China-Taiwan Tensions

War can also cause inflation, as the demand for goods and services rises along with the price of oil. This, in turn, can lead to higher interest rates on home loans.

When War breaks out or threatens to break out (China vs Taiwan), investors tend to take flight to lower risk investments such as Treasury Bills as yields move higher due to inflationary pressures and fixed-income products become less desirable.

Additionally, inflationary pressures typically force central banks to raise interest rates to shrink the money supply thus the longer Russia- Ukraine War persists, the higher chance that interest rates will remain high. 

Reasons Not To Hit 6%

Monetary Authority of Singapore to step in to curb inflation