As spot Sora trends downwards, floating mortgage interest rates may roll back to 2.00-2.50 per cent soon for home loans.
Many are unaware that spot Sora, or the daily overnight rate, has been trending down below 3 per cent in recent weeks. While daily Sora, which stands for Singapore Overnight Rate Average, is known to swing wildly from day to day, the general trend line is still going down.
If this trend continues into January, we will soon see the 3-month compounded Sora value drop back to near-2 per cent range by the middle of March 2023 (compounded Sora is backward-looking, where it averages the daily Sora values for the past 90 days).
As mortgages in Singapore are mostly pegged to the 3-month compounded Sora, this means we will start to see prevailing floating mortgage interest rates roll back to 2.00-2.50 per cent soon, with 2-year fixed rates almost halving to 2.50 per cent from a recent high of 4.50 per cent.
Daily Sora could well snap back up and stay persistently above 3 per cent by mid January. Sora is the rate that banks lend to one another in the interbank market overnight. It is defined as “the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6.15 pm”.
In what could be the first sign of trouble for Singapore’s economy in 2023, the only plausible explanation for this sudden drop in Sora from its peak of over 4.00 per cent is that banks are unable to lend out the excess funds in the interbank market. And that trend is likely to continue with final demand for electronics and semiconductors weakening in major economies such as Europe, the United Kingdom, and more.
With homeowners with floating mortgage interest rates receiving notices on their home loan rate going to 4 per cent in 2023, many may have opted to do lump sum prepayments.
The bottom line is: expect continued volatility going into 2023 as all three major economies of the world slow, from Europe to China, to a more than 50 per cent chance of a Federal Reserve-triggered recession in the United States.
Over the years we see this as the single biggest regret among homeowners who fell “behind the curve” when it came to interest rates – that is, those who waited too long for lock-ins to end when rates had already gone up, or got stuck with a high fixed rate when rates were crashing down.
If you are a homeowner with floating mortgage interest rates, the best thing you can do for yourself is not to sign your rights away for anything more than 12 months – especially in a year when the interest rate cycle is turning. The volatility of the daily Sora attests to the wisdom of that action.
If you just stare hard at the interest rate cycle over the last 30 years, it will not take long for you to realise we are almost at the next peak. But that is not happening now, with many components in the consumer price index (CPI) already showing signs of softening.
As interest rates are likely to peak, pause and come down from here, the obvious choice will be to opt for your mortgages to be pegged to a market-based index such as compounded Sora, which allows you to enjoy the ride down. Inflation in the US becomes the single most important piece of data to watch in 2023, more so than the noise and distraction from the Feds rhetoric or stock market gyrations.
If you are uncertain about the uncertainties of the floating mortgage interest rates, you should speak to a home loan specialist. A home loan specialist will be able to simplify the technical terms for you and help you compare mortgages so that you get the best home loan. The services of home loan specialists are free, so new home buyers have nothing to lose and everything to gain by engaging them.
Payments over the total term of a floating rate mortgage for your new home purchase will vary by design. The interest rate usually starts off low (thus the attraction), but it can later rise. If you opt for a floating rate, you will pay a fixed interest rate for a predetermined time period (usually three years or less), followed by periodic rate adjustments for the remainder of your loan’s term.
This rate is normally a set number of points over a widely published rate, such as the Singapore Overnight Rate Average, or SORA. If that rate rises (or falls), so do your monthly payments.
“I anticipate that the floating mortgage interest rates will increase by 0.5 per cent to above 1.5 per cent by the end of the year,” said Mr Paul Ho, chief officer at iCompareLoan.
“Keeping in mind the rising mortgage interest rates, home owners have to review their mortgages and go for repricing or refinancing to better manage their home loans,” he added.
Home owners who do not have the time to shop for a good refinancing package should speak to mortgage brokers. Mortgage brokers are specialists who are well versed with the banking loan process and have access to hundreds of mortgage and loan packages across many banks. Mortgage brokers help property buyers to get the best home loans and home owners to refinance home loans.
Today, consumers have a wide range of home loan packages to choose from compared to several years ago. Home loans could also be tied up with other programmes which rewards customers with a higher interest rate on their deposits if they transact more with the bank, such as getting a home loan and crediting their salary with the same bank.
Typically, with mortgage loans you are offered attractive rates for the first three years when you refinance – following which the interest rates are adjusted upwards. This usually coincides with the end of the lock in period, offering borrowers a good opportunity to relook their loans.
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