The first two weeks of 2023 have been rather great for the market.
S&P 500 grew by 4.67% YTD. Bitcoin prices grew by a staggering 23% YTD. Even the much battered BABA stock has grown by a tremendous 27% YTD. I have seen my portfolio grow by almost 12% so far. If this momentum continues for the rest of January, it's probably going to be the biggest month of growth for my portfolio since inception.
While I'm keeping track of my investments, I'm also taking a very close look at the trajectory of the interest rates for home loans for the simple reason that I am purchasing a new home this year. I wrote an article about this a few weeks back and you can check it out here.
Interest rates for home loans have a very direct impact on your finances as I'm sure most of us are aware of. A simple 1% difference in the interest rate for a loan quantum of SGD 1M over a tenure of 30 years will mean a difference of SGD 500 in your monthly loan payment. This is a very significant amount considering how expensive everyday household items and food have been. This amount is also a potential sum that you can invest in rather than paying it off for interests. Hence, it's important for us to understand the trajectory of the interest rates and get the best home loan for our circumstances.
For anyone who is purchasing a new home loan or refinancing their existing ones, there are usually just three main loan types to consider- Floating rate tied to 1M SORA, floating rate tied to 3M SORA, or fixed rates.
For the uninitiated, Singapore Overnight Rate Average (SORA) is defined as volume-weighted average borrowing rate in Singapore’s unsecured overnight interbank cash market. Simply put, it represents the interest rates which banks in Singapore transacted to each other on a daily basis.
SORA has quite a direct correlation with the U.S. interest rates in most situations. When the U.S. interest rates go up, SORA do usually go up too (more on that later). The reason why Singapore could not fixed our interest rates and are heavily impacted by the U.S. interest rates is due to the trilemma in international monetary policy. Any government can only choose two out of the following three: Monetary autonomy, exchange rate management and free free capital mobility. Singapore chose to manage the latter two options and give up on the first one. Hence, we are dependent on the global interest rate which in turn is heavily impacted by the U.S. interest rate.
In the past, we used Singapore Interbank Offer Rate (SIBOR) in our home loans. SIBOR is forward looking and hence we do run into situations of SIBOR rates rising in anticipation of interest rate hikes in the U.S. Even before the U.S. raises their interest rate, you will already see SIBOR rates going up, sometimes by a significant amount. SORA is backward looking though and such situations will usually not happen. You can find the daily SORA rates from the MAS website here.
If you have decided to go with floating rates, the one thing which you have to consider next is whether you should go for 1M SORA or 3M SORA. 1M SORA is more volatile as the SORA rate is compounded every month and hence your interest rate will change every month. 3M SORA is less as the compounding of the rate only happens every 3 months. In a rising interest rate environment, it will be better to go with 3M SORA. If you think that the internet rate is going down, 1M SORA will be the better option.
In the past 2 months, we are seeing interesting situations of the spot SORA dipping below 3% and even 2% on certain days (all of this information is transparent on the MAS website listed above). At this point of time, you might be wondering why. You didn't see the Fed reducing the interest rate recently so why is SORA (which has a direct correlation with the U.S. interest rate dropping recently.
There is a comprehensive article written on The Business Times explaining why. In the article, it was explained that a reason behind this is due to the banks not being able to loan out the excess funds in the interbank market. Singapore factory output has shrunk worse than expected in November. This signifies a weakening demand or lesser business activity. When you include other factors such as more homeowners making lump sum payment, the slump in tech scene, and slowing down of major economies like China (due to their fight against COVID), Europe, and The United Kingdom etc, it do seems like there is a good chance that the banks will continue to face an issue loaning out excess funds in the interbank market. When that happens, SORA rates will likely not go up as rapidly as what we have seen in 2022. This is also the reason why some are predicting that we are near or already at the peak of the rates.
I do think that these are good reasons to start expecting a fall in the SORA rates. During times like this when SORA rates are high, banks also offer lower spreads. This could work in your favour as you get to lock in a lower spread with the SORA rates possibly going down soon.
Of course, no one can say with confidence that we are already at the peak of the rates right now especially when we know that the Fed is likely going to continue to increase the interest rates in 2023. However, it's key to note that there are accompanying factors like increased chance of recession and less business activities when the interest rates continue to increase and these accompanying factors will also help in ensuring the SORA rates face downward pressure.
Some of us might still feel uneasiness to go with a floating rate package right now and it's perfectly understandable. If you decide to go with a fixed rate package, just remember to not do a very long lock-in period as the situation might change very quickly and you do not want to end up paying high interest rates for the next few years. If you decide to go with a floating rate package, take this chance to find the package which offers you the lowest spread and the opportunity to do a free package conversion in a year or so.
I have recently published a poll in my Telegram Group asking the subscribers what their choice of loan package is. If you are pondering which loan package to take, do consider joining the group and taking part in the poll to see what others think!