Updated: Jul 1, 2022
With every passing day, the chances of an upcoming recession increases. Just a few days ago, we had more experts highlighting that the US economy is likely to spiral towards a recession next year.
If a global recession strikes, you'll be sure that Singapore will not be spared from it.
While it's usually a good time to invest in equities during recession periods if you are looking to play the long game (refer to this post), the first thing that you should be doing in the wake of a potential recession is not to look at your investment portfolio.
The first thing you should be focusing on is how much leverage (or in simpler terms, debt) you are having. There is a famous saying from Warren Buffett that goes- "It's only when the tide goes out that you learn who has been swimming naked ". You certainly do not want to be the one who is caught naked.
And the biggest leverage which most of us have is our housing loan debt.
The current situation of rising interest rates to combat the inflation situation isn't really helping most of the homeowners. As most of you might be aware, Singapore's economic structure determines us as an "interest taker". The interest rates in Singapore are very dependent on the global interest rates. With the Fed working on a plan to increase the interest rates in the next few months, you'll be sure that things are not going to look rosy here.
In fact, our mortgage rates have already doubled in the past 6 months. The median two-year fixed rate mortgage increased from 1.15 per cent in December last year to 2.25 per cent this month. If you are looking at a three year fixed mortgage, the rate has increased from 1.15 per cent in December last year to 2.5 per cent this month. The new rate is more than doubled. This is due to the fact that banks are expecting the rates to increase even more in the near future.
In situations like this, it's imperative that we look at our financial situation as we head into this potential recession. We certainly do not want to be overly leveraged and end up having to liquidate some of our assets if the situation goes south. After all, recession affects every financial aspect (be it job, housing, investment etc) and it pays to be cautious.
Specifically in Singapore context, highly leveraged homeowners may potentially faced double whammy from the high interest rates and increasing housing supply in the months ahead. While most homeowners are enjoying high rents currently, this situation might change when there are more housing units in the market. If you are looking to invest in a unit for rental income, you might end up receiving less rent (due to the increased supply of units) and paying more (due to increased interest rates) in the near future.
For a $1,000,000 housing loan, an increase of 1% interest rate could mean a difference of $500 in your monthly mortgage payments. Hence, this is certainly a good time to be prudent and prepare for the rainy days ahead.
I once ran a poll in my Telegram group to understand the general attitude towards refinancing home loans during this period of time.
Very interestingly, it's an even split. Half of the people who responded believe that it is the right time to look at refinancing home loan now before it gets even higher while the other half thinks otherwise.
If you belong to the half which believes that it is the right time to refinance your home loan now, you should check out SmartRefi.
SmartRefi is a simple and free service provided by PropertyGuru Finance to track your current mortgage against the interest rates of applicable loan packages in the market to calculate your estimated net potential savings. An email notification will be sent to you whenever there are savings tracked on your loan. PropertyGuru Finance's mortgage experts will help you process your refinancing if and when you decide to refinance.
I once wrote an extensive article on it and explained why you should engage their service in managing your home loan mortgage. You may check out the article here.
While it's important to focus on investing right in recessions, please bear in mind that ensuring you are not overly leveraged is even more important and should be the first thing you consider.
Disclaimer: This post contains affiliate links for PropertyGuru Finance. However, all opinions expressed are my own.
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