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US Fed pledges ‘near zero’ rates through 2022. How will home loans respond in Singapore?

US Federal Reserve (Fed) chairman, Jerome Powell announced that it will hold Fed interest rates at “near zero” and will maintain that level till the end of 2022 on 10 June 2020. The rationale behind this decision is to stimulate the badly affected coronavirus-hit US economy which is estimated to shrink by 6.5% in 2020.

In this instance, floating interest rates for home loans in Singapore are hovering between 1.25% and 1.5% depending on the source of acquisition. As Fed interest rates and interest rates in Singapore are greatly intertwined, the floating interest rates for home loans (especially SIBOR) will remain relatively low till the end of 2022. “For the next two to three years, the US economy is unlikely to recover to the point where home loan interest rates can start to hike,” commented Paul Ho, Chief Mortgage consultant at iCompareLoan.

SIBOR interest rates have seen a decline since March 2020 in response to the two Fed rate cuts due to COVID-19. Based on the chart below, the 1-month SIBOR rate has reached an incredibly low level since the end of May 2020. The 3-month SIBOR rate which averages out the rates from the previous three months, is expected to follow a similar trend.

Graph of 1-month SIBOR rates

Graph of 3-month SIBOR rates


Will home loan interest rates be impacted due to SIBOR?

Although SIBOR rates have been plunging, this doesn’t necessarily mean that home loan interest rates will fall in a similar manner. Since March 2020, banks in Singapore have been increasing their spread on floating rate home loan packages. The spread refers to the added interest rate a bank charges borrowers apart from the SIBOR interest rate. UOB’s 3-month SIBOR home loan packages is one such example whereby its spread for the first year of the three-year fixed package was 0.28%. This then increased to 0.5%, 0.63% and 0.85% in April, May and June respectively.

On the other hand, HSBC offers a home loan package which is tagged to 1-month SIBOR which in turn is more volatile and subject to fluctuations to changes in the external interest rate landscape. HSBC also raised its spread from 0.45% in March/April 2020 to 1.0% in May/June 2020. The current interest rate for this package is estimated to be at 1.25% for May/June 2020.

Also, banks are trying to attract customers away from SIBOR packages with other offerings. For example, DBS is offering a fixed 5-year package that guarantees a flat 1.5% interest rate. It is also noteworthy that a majority of borrowers tend to lean towards fixed rate loans for stability.

Have you considered any particular home loan packages which are attractive? Or have you considered refinancing your home mortgage loan to enjoy lower interest rates?

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