Rising Interest Rates and Mortgage Rates...How High Will it Go and What I Should Do?

As we enter the month of July, the FED continues to be hawkish towards the raising of interest rates.  I am also adversely affected as closer to home, the mortgage rates in Singapore has risen with no ceiling in sight for the past year.  Since August 2021, 3-month sibor rates has increased more than 4.4 times from 0.43% to 1.91% in July 2022, while just within the past one month, we saw the steepest increase from 1.34% to 1.91%, an alarming 40% jump.  With this increase, one can't help but wonder when is the peak going to be?

The whole situation is definitely aggravated by the newly released June CPI numbers in US, where inflation comes in at a red hot 9.1%!  This probably pushes the FED further into the corner, and I am no longer surprise if they intend to raise interest rates in July by 0.75%, or even by 1.0%!  When all seems doom and  gloom, one thing to note is the fact that this CPI data is backward looking.  The current ray of hope presents itself in the commodity prices this month, most evidently observed in crude oil prices which has fallen below USD 100.00 this week.  If prices of commodities remain depressed through the month of July, there is a good chance inflation can be tamed.  Nonetheless, how successful this will be, only time will tell.  This uncertainty is also reflected in the sudden decision by Monetary Authority of Singapore (MAS) to tighten monetary policy in surprise off-cycle move, in a bid to tame inflation on Singapore's shores as well.

So, how does the "never-ending" rising interest rates affect borrowers in Singapore, especially home owners with outstanding mortgage loan?  Based on a SGD 500K loan with 30 years tenure, an increase in interest rate by a 0.5% will cause the monthly instalment to increase by approximately SGD 120.00.  This amount may not seem much, but considering either a bigger outstanding loan, or a much higher increase in interest rates, or even a combination of both, the resulting amount may become a burden to borrowers.  As I have mentioned many times, I am glad that since April 2022, I have done the application to lock in 2 year fixed rates at 1.45% for year 1 and 1.55% for year 2.  Looking at all fixed rate packages now, almost all are above 3%.  Even the lower-rates floating packages are hovering above 2% currently.  How high will the rates climb to, and when will reversal of rates set in is anyone's guess.  We can only hope for the best, and be prepared for the worse.

At the meantime, I will:

1)    Pause my transfer of CPF monies from Ordinary Account to Special Account.

I shall start to accumulate more money in my OA as a safety net for any possible looming recession, so that if any hiccups occur to my cashflow, I will have sufficiently monies in OA to pay for my loan for at least 3 to 6 months in the near term.  This amount is predictable for me as my foreseeable mortgage is under fixed rate for the next 2 years.

2)    Start to build up a larger cash buffer.

Time for me to save up more cash as well, and use the cash to purchase Singapore Savings Bonds to earn some interests.  The purpose of this cash is to protect against the unforeseen circumstances where interest rates (SORA) remains elevated after my 2-year fixed rates.  By then, if mortgage interest of 3% or more becomes a norm, I shall make use of this cash to do partial repayment to reduce my outstanding loan amount.  If interest rates has reversed to below 2%, the cash can be used as opportunity funds to invest in equities.

3)    Delay all long-distances travel to later date.

After my 3 day 2 night trip in early July to Cambodia, evidently inflation is all over the world.  The highest increase lies in the cost of air fares.  With prices of air fares at such elevated levels, despite the strengthening of USD and even SGD against most currencies like Japanese Yen, Korean Won and even the Euros, the total cost of such travels may still be higher than before.  Therefore, I believe it shall be better to put on hold all these travel itineraries (the increase in the number of Covid cases all over the world serves as a good complementary reason for the decision to delay travel).  If I am still itching for travel, I will just satisfy the cravings by land travel to Johor, Malaysia, and take domestic flights to different parts of Malaysia at a substantially lower costs.  Time for "Cuti-cuti Malaysia"!

At the meantime, I shall continue with what I can control, and make the best out of any situations for things beyond my control.  Barista FIRE, here I come...!