SINGAPORE (Jan 16): When several friends began lamenting the spikes in their monthly mortgage repayments after interest rates in Singapore surged at the beginning of 2016, I made a mental note to take precautions against any unwelcome volatility when my turn came to buy a home.

At the time, the US Federal Reserve had just hiked its federal funds rate to 25 basis points (bps) for the first time since the 2008 global financial crisis, taking the thee-month Singapore Interbank Offered Rate (Sibor) to 1.254%, a seven-year high. The Fed also said that it would hike rates another four times in 2016, indicating that housing loans in Singapore would become even more expensive.

As it turned out, the Fed managed to raise rates only once last Dec ember, by just 25bps. In response, Sibor, which mirrors the federal funds rate, ticked up to 0.926% from 0.875% in November. On Jan 12, Sibor was 0.967%.

The rising volatility in interest rates worries me now that I, too, am planning to buy a HDB flat very soon. Traditionally, Singapore banks offer buyers the option of taking a loan priced at a fixed interest rate or floating rate, which is usually Sibor plus the bank’s spread rate. This covers its credit risks, operating expenses and a desired return on shareholders’ funds.

On the one hand, with rates trending up, settling for a bank loan priced at a fixed rate would bring welcome stability to my monthly mortgage repayments. On the other hand, fixed rates tend to be priced at a premium to Sibor. With no guarantee that US rates would keep rising, I did not want to be tied down to an overpriced mortgage should the Fed decide not to tighten monetary policy.

Deciding factor
Meanwhile, I am also considering several other factors. With stability the key to managing volatile interest rates, fixed rates appear to be the best option. But under a fixed rate mortgage, borrowers are not allowed to prepay their loans during the lock-in period.

“The trend is HDB owners tend to prepay portions of their loans in a lump sum as and when [their] funds allow it, so they can pay off the debt sooner. This is not allowed under a fixed rate plan as the loan amount must be preserved during the lock-in period,” says Tok Geok Peng, DBS’s senior vice-president for consumer deposits.

The other factor to consider is the prospect of unemployment given the pace of disruption in the economy. This is a concern because the absence of a regular pay cheque will not only affect my capacity to pay the monthly instalments, it will also affect my ability to refinance in the future.

One way to manage this is by taking a smaller loan. Yet, I also want to take advantage of weak property prices to buy a four-room flat in a good location, while preserving my cash for rainy days. As such, I am likely to take a larger loan, while using income from renting out a room or two to help cover the monthly payments.

Volatile rates
Fortunately, the banks are now offering a third financing option — a floating rate plan pegged to its fixed deposit rate. DBS Bank was the first to launch its Fixed Deposit Home Rate plan in 2014. “The FHR is typically higher than Sibor but offers more stability as the bank’s FD rate tends to rise or fall more slowly than Sibor,” Tok tells me.

However, the FHR plan comes with a two-year lock-in period, during which the bank’s spread rate is fixed but the FD rate is subject to change. Since the launch of this new option, DBS has raised its FD rate once, from 0.5% to 0.6% in 2015. While rates based on Sibor fluctuate with the market, FD rates are more stable and change only when “market rates are moving sustainably in one direction or when we see the need to be more competitive versus the other banks. Under the FHR plan, borrowers can enjoy stability on their loan repayments for a longer period than with Sibor plans, but pay a lower rate than fixed rate plans”, says Tok.

Currently, Standard Chartered is offering the lowest FD-pegged mortgage at a 48-month rate of 0.5% plus a spread of 0.98%, which is a total of 1.48% interest with a two-year lock-in period. However, mortgage ad visers tell me the bank will be adjusting this rate very soon.

DBS offers an FHR plan at 1.5% based on its 18-month FD rate of 0.6% with a two-year lock-in period. Its fixed rate plan is priced higher, at 1.88%. In comparison, UOB offers a similar 1.5% interest rate based on its 36-month FD rate of 0.65% with a two-year lock-in period. However, its fixed rate plan is slightly lower at 1.8%.

Based on its 36-month FD rate of 0.65%, OCBC Bank is offering an FD-pegged interest rate of 1.48% during the first year followed by a rate of 1.52% from the second year on. There is also a 2-year lock-in period involved.

As I am not counting on the Fed raising rates three times this year as guided, I am inclined to go for an FDbased rate plan in view of its flexibility and pricing relative to fixed rates, and stability relative to Sibor. On the other hand, if Donald Trump actually succeeds in “making America great again”, I stand to lose out by not choosing a fixed rate when inflation rises and interest rates soar. Perhaps a smaller and cheaper flat is what I should go for.

This article appears in Issue 762 (Jan 16) of The Edge Singapore which is on sale now