Online Calculator | Will Interest Rates Go Up Soon For Singapore Property Mortgages?

Will Interest Rates Go Up Soon For Singapore Property Mortgages?

Many people are concerned that the current low rate environment in Singapore could end by the end of the present year, driving up the cost of mortgages and putting stress on the property market. In this piece we take a look at how interest rates in Singapore are determined, and where they are probably going to head for the rest of the year and beyond.

How are interest rates determined?

In a 1999 paper titled “Interbank Interest Rate Grit in Singapore and its Linkages to Deposit and Prime Rates”, staff of the Monetary Authority of Singapore (MAS), the central bank, revealed that “only changes in US rates or market expectations of future movements in the exchange rate have a major result on the domestic interbank rate.”

But other researchers have discovered that the SIBOR has historically been positively linked to the movement of the bank loan to deposit proportion, even after controlling for the impact of US IRs. This means that if bank loans grow faster than deposits, SIBOR tends to head upwards.

So to summarize, precisely how IRs in Singapore are determined is a controversial topic and there isn't any simple formula! But we all know there are 3 serious factors that will influence it: 1) US rates 2) Market expectations of the Singapore Dollar exchange rate (will it appreciate or depreciate?) and 3) Demand and supply for loans and deposits in Singapore.

So where are IRs heading?

HK mortgage rates have already risen by as much as 1% during the last three months, driven by tight liquidity in the bank system as the expansion of loans have outpaced the expansion of deposits. Will IRs in Singapore also head upwards due to the demand-supply dynamics in the local bank system, even if US IRs stay low for the moment?

In a corresponding situation to HK, loans have been growing quicker than deposits, with loan growth till April of 21.9% versus deposit expansion of 12.7%. If the distance between the expansion of loans and deposits continues, this can increase the negotiating power of local banks and increase the probability of a higher SIBOR and also rate spread above SIBOR for mortgages.

But Hong Kong has its own specific dynamics “there's been a growing shift into Renminbi from HK Greenback deposits, which has been absent in Singapore as the MAS has let the Singapore Buck appreciate against the US dollar, whereas the HK Dollar is pegged to it. In fact, the Singapore Greenback has even appreciated against the Renminbi during the last two years! But if the MAS decides to slow the appreciation of the Singapore Buck, we could begin to see raised interest rates.

Also, the Singapore government’s recent moves to dampen supposition in the property sector can lead to both fewer transactions and therefore mortgage volume, and also a lower mortgage per exchange (as the Loan To Valuation limit has been decreased for investment properties). This means that loan expansion might begin to weaken, while deposit growth remains healthy in spite of the low rates as people wish to park their cash in a “strong” currency.

As for where US interest rates are headed, it is anybody's guess. But Singapore’s Asian neighbors China and India have already been raising rates to attempt to deal with rising inflation. If inflation starts becoming a controversy in the USA, and policymakers have confidence in the power of the economy, then IR walks could come earlier than anticipated.

While we do not expect a large spike in rates anytime soon, they definitely can’t go much lower, and borrowers should be prepared for scenarios where they start moving higher. For house purchasers, this indicates that you shouldn't assume that interest rates will always remain this low, and to plan your financial affairs so you will still be in a position to meet your mortgage payments regardless of if IRs rise.

Hope that you enjoyed reading this Singapore property market article!

Propwise.sg, a top Singapore property blog, is dedicated to helping you understand the estate market and make better calls. Visit us to read more Singapore property market articles.

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