If you’re a homeowner, interest rate is highly relevant to you. If the interest rate continues to remain high, you might want to consider some ways to refinance or reprice to lower your mortgage rate.
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Chloe had an interview with Ethan, who runs Unbeatable Mortgage. They provide deep market insights to guide clients on where their mortgage rates might head and to assist them in deciding between fixed and floating options. They understand that mortgages represent a significant expense for many investors, so they do their job seriously.
What Affects Interest Rates
Regarding interest rates, there are two main types of economies: export-driven and import-driven.
Export-driven economies, like China, Japan, and Korea, aim to produce many goods. They usually have low interest rates because it helps them make more goods.
Import-driven economies, like the US, UK, and the Eurozone, prefer higher interest rates. This strengthens their currency, letting them buy more goods from export-driven countries.
If we look at Singapore, it's somewhere in the middle. Singapore has a unique policy where it often follows US interest rates. So, Singapore's rates are closely tied to the US and are influenced by foreign exchange rates.
This means that Singapore's rates generally follow the US's trend but are usually lower. This affects the SORA rates, impacting the mortgage rates banks offer in Singapore.
SORA vs. EFFR
SORA stands for the Singapore Overnight Rate Average. It's the rate at which banks in Singapore lend money to each other overnight. If banks need extra money, they borrow it at the SORA rate.
Meanwhile, the U.S. Federal Reserve sets the EFFR or Effective Federal Funds Rate. It's used to control inflation and ensure maximum employment in the U.S. Every quarter, they meet and publish their predictions for this rate.
The EFFR is 5.6%, but it's expected to decrease in the coming years. It is also likely to drop from 5.6 to 2.9. Usually, Singapore's SORA follows the trend of the U.S. EFFR, but it's a bit lower. So, if the U.S. drops its rate, Singapore might, too. You can make some predictions based on data but always consult with a mortgage expert before making decisions.
Now, talking about interest rates, they impact the stock market. When interest rates are high, it's costly for companies to borrow money, which can slow their growth. This often leads to investors selling stocks, which can decrease stock prices.
Recently, the stock market has been shaky due to rising interest rates. In deciding where to invest, you must weigh the risks and rewards. Sometimes, safer options like bonds seem more attractive than riskier stocks.
Data is also crucial when predicting financial trends. One tool we use is the dynamic yield curve, which shows where people expect interest rates to be in the future.
The dynamic U curve initially indicates that interest rates are expected to decrease in around two years. On the other hand, an inverted U curve reveals that the short-term 2-year fixed deposits offer higher returns than the 10-year deposits.
Historically, when the interest rate for the 2-year deposit surpasses the 10-year rate, it has been a precursor to recessions. The current negative spreads in the curve are the longest since July 2022, hinting at a potential upcoming recession.
Furthermore, Ethan highlights the economy's complexity, mentioning other factors like money printing during the COVID-19 pandemic in 2019-2020. In response to high inflation, short-term interest rates were increased.
The Federal Open Market Committee (FOMC) meeting will provide insights on interest rate predictions, with the sentiment being that rates might rise further.
Fixed Rates or Floating Rates
Ethan mentioned fluctuating SORA rates, revealing the current rates for 3-month and 1-month SORA. Personal experiences underscored the financial strain of soaring interest rates on homeowners. The importance of consulting professionals helps homeowners find the best mortgage options.
While the two-year rate seemed favorable at 3.05%, there might be lock-in clauses to consider. The one-year fixed rate might restrict switching banks or repricing within two years. Homeowners are advised to compare rates and consider how loan structures impact their ability to seek better rates in the future.
The difference between the one-year and two-year fixed rates is small and almost negligible. From Ethan’s point of view, choosing the one-year option provides greater flexibility for homeowners.
Depending on market conditions, you can entertain collaboration with another bank in a year to secure the best available interest rate. Despite the possibility of temporary interest rate increases, they will likely be lower than the current rates.
A potential 8% drop in interest rates within a year is foreseen based on projections. From their viewpoint, this temporary increase may be followed by a subsequent decline. Even a 10% to 20% drop, while not as significant as a 22% decrease, carries importance. During this period, the bank's offerings may surpass the 0.1% discount being contemplated.
Furthermore, he mentioned that a commitment to a two-year rate is likely in the subsequent year. Considering the 0.1% difference over two years does not represent a substantial advantage.
The personal preference for the one-year option is also discussed due to a desire for flexibility in potentially selling the house without incurring a tax penalty in a year. However, seeking advice is essential regarding whether the one-year or two-year option is more suitable for those planning to keep their houses for two years or longer.
Considering the 1.5% penalty if a house is sold during a lock-in period, irrespective of the slight interest rate difference, is essential. You should always take this crucial factor into account during consultations.
Planning for when you intend to sell is essential, proposing that opting for the one-year lock-in may be wise if someone does not plan to sell in the next two or three years—after a year, assessing the market's offerings because much can change in that time.
Interest rates might continue to rise a year from now, and consider whether locking in for two years now is a better deal.
There is also the market's unpredictability and the potential for unexpected events like crises or wars. During such circumstances, the best approach is to analyze the available data and make the wisest decision possible.
While you cannot rule out the possibility of interest rates continuing to rise despite predictions of a fall, it is more probable that a year from now, interest rates will start to drop or stabilize. A one-year lock-in is a better option for investors.
For example, John and Sally, two fictitious characters, aim to discuss mortgage rates, focusing on interest rates after the first year, as they find the rates for the initial two years satisfactory.
However, they stress the importance of avoiding these higher rates to save money, especially when factoring in rates after three months plus a 1% increase, which would amount to approximately 4.71%.
Their awareness of this matter has grown after consulting with Ethan, leading them to realize the significance of reviewing their mortgage every two years. Consider refinancing or repricing the mortgage and seek guidance from Ethan or other experts if you need clarification.
The potential savings, from a 4.75% interest rate to a 3.2% rate while maintaining the same loan duration, could yield monthly savings of $581. Extending the loan duration could result in more significant monthly savings, approximately $947.
Despite a slightly higher monthly payment, the overall savings are substantial, potentially amounting to $8,000 in two years.
The decision to keep cash or pay interest rates hinges on inflation rates, underscoring the importance of understanding how inflation impacts one's finances. Ethan also highlights the significance of comprehending actual interest rates, which reveal the true cost of borrowing and the return on savings. They describe mortgages as one of the most cost-effective forms of financing due to their long-term nature and collateral backing.
Expert advice is also crucial, noting that banks may only offer the best deals if one has connections. Low interest rates create an opportune moment to invest in stocks, as the stock market performs better under such conditions.
In conclusion, careful consideration of mortgage options and a keen eye on market dynamics are essential for making informed decisions. Personal preferences for shorter-term options, like the one-year lock-in, may provide flexibility for plans.
However, it is crucial to seek expert advice, particularly in assessing potential penalties and monitoring market fluctuations. While the future remains uncertain, the consensus leans towards the probability of interest rates stabilizing or decreasing in the coming year.
This underscores the value of timely action to secure favorable mortgage terms and maximize savings.
Watch the full video on Chloe Lin - Arigato Investor’s YouTube Channel.
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