Impact of interest rate cuts on home loans: Is this a good time to refinance?

/ EdgeProp Singapore |

August 29, 2024 6:04 PM SGT

Domestic interest rates have been coming down very slowly in anticipation of further US Federal rate cuts (Photo: Albert Chua/The Edge Singapore)

SINGAPORE (EDGEPROP) - On Aug 23, the US Federal Reserve chair Jerome Powell said “the time has come” to begin lowering interest rates. It has raised expectations of an interest rate cut at the next Federal Open Market Committee meeting in mid-September.

However, the magnitude of the first rate cut and the subsequent trajectory remains uncertain, says Jacquelyn Tan, UOB’s head of group personal financial services.

Singapore interest rate movements have historically aligned with US interest rates, says Clive Chng, associate director at Redbrick Mortgage Advisory. “When US interest rate increases or drops, Singapore interest rates and mortgage rates will follow suit.”

Interest rates in Singapore have already been sliding in recent months in anticipation of US interest rate cuts, notes Chua Hak Bin, regional co-head of macro-research at Maybank Investment Banking Group. “Mortgage rates will likely continue falling as the Fed eases monetary policy and cut interest rates.”

Mortgage rates, especially for fixed-rate mortgages, have dipped, with two-year fixed-rate mortgage packages available at nearly 3%.

The three-month Singapore Overnight Rate Average (Sora), the benchmark local banks use for floating mortgages, has already come down. At the start of January, Sora was 3.701%, and as of Aug 28, it stood at 3.572%, based on the Monetary Authority of Singapore rates.

Maybank’s Chua expects the three-month Sora rate to hit 3.4% by the end of the year. He projects a cumulative Fed rate cut of 50 basis points (bps) by the end of 2024. He estimates that the three-month Sora rate could drop further to 2.7% by the end of 2025.

Capitalising on lower interest rate trend

Chua believes homeowners should capitalise on the lower interest rates to refinance their existing mortgages. However, he expects some “sticker shock” for some homeowners with a mortgage pegged to the Singapore Interbank Offered Rate (Sibor), which will be discontinued after Dec 31. This is because Sora tends to be higher than Sibor.

“Homeowners should review and shop for more attractive mortgage deals if their financing rates have jumped because of the transition to a Sora benchmark,” says Chua. “Singaporean homeowners — both new and existing homeowners — should benefit from the lower financing rates.”

For instance, if a home buyer takes on a $1 million home loan at an interest rate of 3.6% over 30 years, the estimated mortgage instalment is $4,546 per month, says Lee Sze Teck, senior director of research and data analytics, Huttons Asia. If interest rates were down to 3.1% by the end of 2024, the monthly instalment would be $4,270, which translates to a monthly savings of $276.

“For buyers with an outstanding mortgage loan, they should stay nimble and avoid locking themselves in a loan package, especially when the interest rate is expected to decline,” says Lee. “They may want to consider a variable rate package with a one-year lock-in.”

A lower mortgage rate will also impact the loan amount a homebuyer can qualify for. Most banks use the Sora + 1% as the interest rate in a stress test. Buyers with a combined monthly income of $16,000 and loan tenure of 30 years can borrow up to $1.7 million. If the stress test interest rate is lowered by 50 bps, the loan quantum will increase by $100,000 to $1.8 million (See table).

Reprice or refinance?

Some homeowners may consider repricing or switching to a new loan package with the same bank, but repricing fees could apply. Others may consider refinancing by switching to another bank offering a more favourable home package.

Refinancing offers homeowners an opportunity to optimise their mortgage terms, potentially lower interest rates and enjoy lower monthly instalments, says UOB’s Tan. They may also change their loan type and features to adjust to changing market offerings and trends, she adds.

However, refinancing and switching out to another bank incurs additional costs such as legal fees, valuation fees, prepayment penalties, or clawback of subsidies, cautions Tan. “Homeowners should, therefore, calculate if the total additional costs outweigh the potential savings from refinancing out.”

Some home loans may be part of an overall package with savings and credit cards, says Huttons’ Lee. He adds that switching out from one bank may result in the loss of higher interest on the savings account.

Fixed-rate loans ‘more attractively priced’

Banks have generally priced fixed-rate loans more attractively than Sora-pegged loans over the past year, says UOB’s Tan, and this trend is expected to continue into 2025.

At OCBC, there are one-, two- and three-year fixed-rate mortgage packages and floating rate packages pegged to the three-month Sora. “The two-year fixed rate package remains the most popular, and it is priced about 0.35% lower compared to a year ago,” says Maryanne Phua, head of home loans at OCBC.

Chng of Redbrick Mortgage sees some banks offering free conversion between fixed and floating rates after a year or a one-year fixed interest rate with a two-year lock-in period. It allows the homeowner to move to a variable interest rate package in the second year, he says.

Given the competitive loan environment, banks may also compete by offering fully subsidised valuation and legal fees for those looking to refinance, notes Huttons’ Lee.

Interest rates in Singapore are not expected to fall significantly. Redbrick’s Chng says: “Barring a recession, we expect interest rates to see a very slow downward movement.”

With Singapore adopting an “appreciation stance” on its monetary policy to ward off subborn inflationary pressures, UOB’s Tan does not expect the decline in domestic interest rates to be in sync with that of US interest rates.

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