SIBOR up, Potential Yields Down: What should property owners do?

What affects SGD interest rates

Monetary Policy

Singapore’s monetary policy manages the value of the Sing-Dollar against a basket of currencies of our major trading partners (with USD as a primary component). With that, Singapore has allowed a direct influence on domestic interest rates by the interest rates of the currencies in this basket. Hence, movements or anticipated movements in US interest rates or strength of the Sing-Dollar will give rise to a significant impact on the domestic interest rates. With anticipation that the Sing-Dollar will depreciate against the basket of currencies, it seems like the domestic interbank rates will continue to hike. 

Money Supply

Following the BASEL III implementation timeline, local banks have to adhere to the Liquidity Coverage Ratio (LCR) of 60% by 1 Jan 2015, rising 10% points each year to reach 100% by 1 Jan 2019. To meet the higher capital requirements, banks will inadvertently increase their lending spreads.  

What it means to property owners

Negative Yield

Interest cost is often the largest expense associated with property ownership. Current rental yield averages 3% – 5% across Singapore’s real estate market. Should SIBOR normalise to historical average of 2% – 3%; with banks’ spreads of about 1%; real estate investment yield could very well fall into negative territory. This in turn reduces the attractiveness of real estate as an asset class for investment. 

Transaction Volume

With net rental yield set out to be less enticing, coupled with a stricter financing framework (TDSR) and government cooling measures in place, we are likely to see a decline in transaction volume. 

It seems like investors’ focus could well turn to cost-control, rather than aggressive acquisition on their real estate portfolio.

What should property owners do?

Homeowners and real estate investors in Singapore have long practiced a review of their mortgages every 2 – 3 years to take advantage of promotional rates dangled by banks to draw in new customers. Following the latest spike in SIBOR, property owners have turned their preferences to fixed interest rates, to hedge against further rate increases. 

There are some key considerations before refinancing your home loan packages:

Prepayment Penalties on Existing Home Loans

Prepayment penalties in your loan contracts can reduce your interest savings. Making that extra step to check out when your lock-in period expires can help to maximise interest savings as the penalties can range from 0.5% to 2% of your outstanding loan amount. 

Reimbursements on Subsidies

Your current financier might have helped pay for legal fees, valuation and fire insurance costs when you first took up the loan. Premature redemption of your home loan (usually within 3 years) might lead to a refund on these subsidies. 

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