Construction site in Singapore (Photo by leungcopan from Shutterstock.com)

Young lawyer at 28 already saddled with $1.1 million mortgage loan

South China Morning Post reported yesterday that as the era of ultra-low interest rates is over, Singaporeans with home mortgage payments are now feeling the pinch (‘What rising interest rates mean for Singapore property‘, 25 Dec).

Indeed, last Wed (19 Dec), the US Federal Reserve raised the benchmark interest rate again, the 4th time this year, which sent Wall Street tumbling. The Fed raised short-term rates by a quarter of a percentage point from 2.25 to 2.5 percent.

This was the ninth increase since the end of 2015. It’s the highest that rates have climbed since the financial crisis a decade ago. Even though the latest quarter-point jump is no different from previous increases, but consumers are beginning to feel the cumulative effect of the interest rate hike in the past 3 years, as it influences how banks and other lenders price their loans.

And in Singapore, the Singapore Interbank Offered Rate (SIBOR), in turn, closely follows the US Fed rates. Hence, it is no surprise that the Singapore’s home mortgage rates which follow SIBOR have also been climbing in the past 3 years. The increase in SIBOR rates was particularly pronounced in the past 1 year:

Presently, the SIBOR rates are:

1-mth SIBOR 1.641%
3-mth SIBOR 1.768%
6-mth SIBOR 1.885%
12-mth SIBOR 2.068%

The home mortgage rates offered by the various banks are typically some points above SIBOR.

$1.1 million home mortgage loan

SCMP went on to report that a young Singaporean lawyer, 28, Grace Koh who settled into her new condominium apartment along the East Coast in August this year, is currently saddled with a $1.1 million mortgage loan.

When she first took out the $1.1 million home loan with her husband in June last year, the interest rate had been a more attractive 1.3 per cent. Their mortgage is pegged to a floating interest rate that fluctuates according to SIBOR.

But in less than 2 years, it came as a rude shock to Grace to see her home loan interest rate increasing rapidly. She and her husband had gone with a floating rate package for their loan simply because “it was the lowest rate” they were offered when they bought their condo.

“My mortgage repayment used to be $3,800 each month, but now it’s about $4,000 (in a period of 1.5 years). The $200 mark-up may not seem a lot, but it all adds up,” she said, adding that next year – when the couple are due to refinance their loan – the rate will be raised further to 2.4 per cent. This is an 85% jump from the 1.3 per cent when she first took the more than million dollar loan together with her husband 1.5 years ago.

“We just have to watch our spending and make do within our means,” she said.

Interest rates going up

For Grace, and other Singaporeans like her, the pinch of mortgage payments is likely to hurt more as interest rates go up.

The latest fixed rates on mortgages offered by banks today can be as high as 2.5 per cent – well above the 1.65 per cent from earlier in the year, said Alfred Chia, chief executive of financial advisory firm SingCapital.

Song Seng Wun, an economist with CIMB, expects SIBOR rates to climb from current levels of about 2 per cent to 3 per cent (that is, 50% more) by the end of 2019, in tandem with more US Fed rate increases set to take place over the next year.

Last month (Nov 2018), MAS urges home buyers to be mindful of rising interest rates as well as the upcoming supply of home units to the market.

“Households considering property purchases should carefully consider the impact of interest rate increases and the upcoming supply of new units in the medium term,” MAS said.

With the “headwinds of rising interest rates” and with rental yields expected to remain weak, it said that prospective buyers should remain prudent in their buying decisions and factor in likely increases in their debt servicing burdens.

“Over-leveraged households could also see a rapid deterioration in their balance sheet indicators if there is a sharp correction in property prices,” it warned home buyers.

MAS further added, “Sharp increases in prices, if left unchecked, could have run ahead of economic fundamentals and raised the risk of a destabilising correction later, especially with rising interest rates and the strong pipeline of housing supply.”

But MAS also assured everyone that Singapore’s household balance sheets “remain healthy”, with liquid assets such as cash and deposits exceeding total household liabilities, providing households with “strong financial buffers”.

In any case, despite MAS’ assurance, Grace told SCMP that besides tightening the purse strings, plans to have children and start a family are also being shelved for now.

“The cost of living here is rising, but our salaries aren’t moving much,” she said. “We’ll take things one step at a time.”

Of course, with a more than million dollar mortgage millstone around both Grace and her husband’s necks, they’d also better hope that neither of them will be retrenched or replaced by “foreign talents” in the next 30 years of their career.

Otherwise when the bank starts to recall their mortgage loan due to non-payment of the mortgage installments, they will have to, like what MAS said, use their “strong financial buffers” to pay-off their mortgage liability. That “strong financial buffers” may very well come from their parents’ retirement monies.