We calculate whether it's more worthwhile to take up a fixed or floating rate mortgage loan now.
A few friends have been asking whether they should take up a fixed or floating mortgage rate for their home loan.
This comes after the 3-month compounded Sora crossed 3% for the first time since 2007 earlier this week.
Since housing loan repayments could represent a significant portion of a household’s monthly expenses, we decided to assess if it might make more sense to take a fixed or floating rate mortgage now.
Should we take a fixed or floating rate loan?
#1 – Fixed rate loan now at 4.25% a year and above
Let’s start by looking at some of the fixed rate packages in the market.
It seems like both DBS and UOB are offering fixed rate packages of 4.25% for various tenors.
For illustration purpose, we will use the UOB two-year fixed rate package of 4.25% a year.
Using an illustrative example of a S$1 million loan to be repaid over 25 years at a fixed interest rate of 4.25% for the next 25 years, the monthly payment would come up to about $5,417.
#2 – Floating rate tied to SORA also inching closer to 4%
If you are not familiar with Singapore Overnight Rate Average (SORA), it is what new benchmark that floating rate mortgages are tied to these days.
You can find out more about SORA on the MAS page, so we shall not go into the technical details of how it’s calculated here.
The SORA is a floating rate that is based on yesterday’s actual interbank lending transactions. It is published daily on the MAS website
The 3-month compound SORA has been rising steadily since early this year, and is at 3.0664% as at 9 December.
If we were to use a floating rate package with SORA + 0.70% in the first two years as an example, the interest rate for the mortgage would come up to about 3.77% based on the 3-month SORA of 3.0664% as of 9 December.
Putting this floating interest rate into our mortgage calculator, it would come up to a monthly payment of about S$5,152 for the first two years based on the current SORA.
This would represent a monthly payment that is about S$265 lower than the fixed rate of 4.25%.
#3 – Could SORA go up higher?
The next question you’d probably have is whether the SORA rates could continue to go up, such that we will eventually end up making higher monthly repayments for the floating rate loan.
The SORA tends to move together with the US Fed Fund Rate, though the magnitude of the change may not be the same.
For example, the SORA was at 3.0664% as at 9 December, even though the US Fed Fund Rate was at 3.75%.
Based on the Fed’s projections, the Fed Fund Rate could rise by another 0.50% in December 2022. This is expected to bring the Fed Fund Rate to about 4.1-4.4%.
This will be followed by another 0.25%-0.50% hike in 2023, which will bring the Fed Fund rate to 4.4-4.9%.
If the expected interest rate increases really do come true, it would represent a further 0.75-1% increase in the Fed fund rate from current levels.
If we were to assume that the SORA follows the Fed fund rate and increase by a similar level of 0.75%, it would get to about 3.82%. This would mean that the floating rate package interest rate would be close to 4.52%.
There are other factors that will affect SORA, such as MAS monetary policy, liquidity conditions of the banks.
DBS economists expect the SORA to increase to 3.5% in 2023. This would mean that the floating rate package interest rate would be close to 4.2%, quite close to the fixed rate available.
#4 - Could SORA start falling?
The Fed is projecting that interest rates could start coming down in 2024, where the projected Fed Funds rate is at 3.4-4.4%.
This is about 0.50-1.0% lower than the projected Fed Fund Rate in 2023.
Putting this all together, we decided to come up with a bull and bear case based on the US interest rate direction.
In the bull case with smaller pace of interest rate increase of 0.25% in 2023, and faster decline of 1% in 2024, then the average SORA could get to about 3.32%, and the average mortgage rate would be about 4.0%.
In the bear case with faster pace of interest rate increase of 0.50% in 2023, and slower decline of 0.50% in 2024, then the average SORA could get to about 3.82%, and the average mortgage rate would be about 4.5%.
|Average over 2 years
|+0.25% in 2023 and -1% in 2024
|Average over 2 years
|+0.5% in 2023 and -0.5% in 2024
What would Beansprout do?
There are many moving parts around interest rate projections in the coming years.
Even the US Federal Reserve was not able to get its projections right, as it had to raise its projections between June and September this year as inflation was higher and more persistent than expected.
Apart from that, it may not translate directly to movements in the SORA, due to various factors such as MAS’ monetary policy.
From the calculation above, the fixed rate package of 4.25% would fall within the range of SORA outcomes based on the Fed’s interest rate projections.
This means that based on current projections, the amount that you’ll have to pay for your mortgage may not be significantly different whether it is a fixed or floating rate.
In this case, whether to take a fixed or floating rate mortgage would depend on whether you can sleep well at night with the uncertainty of not knowing what interest rate you’d be paying for your mortgage.
If inflation were to stay persistently high, then interest rates could end up being higher than the Fed’s projections above.
Personally, I'd go for the fixed rate loan to be able to plan my finances better without having to worry about what the Fed will say or do next.
Still undecided about whether you should take a fixed or floating mortgage rate, join our Telegram group where there are many helpful souls who’ll share the latest bank mortgage deals!
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