Singapore, 21 Aug 2022 Our median mortgage rates have almost doubled over the past six months. As more rate hikes are on the cards, how will our residential market be affected? Which market segment is likely to be impacted? Will home prices fall when interest rates rise?
Marginal impact on the current housing market
Over the past two months, we have seen a sudden surge of buyers into the market to lock in the home loan rates before they climb higher. Home buyers now face higher borrowing costs and those who take a maximum housing loan or hold multiple properties with an unstable income may be most affected. Home buyers who own a single unit, especially those with dual incomes, may be the least affected.
All borrowers must adhere to the total debt servicing ratio (TDSR) ruling, whereby the threshold for property loans uses a stringent 3.5 per cent interest rate computation. Since the fixed-rate packages offered by some banks have already gone past 3 per cent per annum and a few banks have suspended their fixed-rate loan packages entirely, many buyers have now opted for a floating-rate loan package.
The floating loan rates are pegged to the three-month compounded Singapore Overnight Rate Average (Sora) plus a margin of 0.8 to 1 per cent. The three-month compounded Sora rate was around 1.3 per cent early this month, which translates to approximately a 2.1 to 2.3 per cent floating loan rate. This floating loan rate is still below the 2.5 per cent in the second quarter of 2019, the highest interest rate recorded over the past 10 years. How will the rate hikes impact the different market segments?
HDB resale and BTO projects
More first-time borrowers may take up an HDB loan since many fixed-rate bank mortgages have risen above the 2.6 per cent HDB loan rate. This rate has not changed since 1999.
For borrowers who have already applied for a private loan and are ineligible to take an HDB loan, the current interest rate increase may still be manageable since the loan quantum for flats is usually not big.
For instance, the median price of a resale flat is around $500,000. The monthly instalment on a 30-year loan term and 75 per cent loan-to-value (LTV) ratio increases by around $138 a month if the interest rate rises from 2.3 per cent ($1,443 a month) to 3 per cent ($1,581 a month). For a $300,000 Build-To-Order (BTO) flat purchase, the monthly increase is only around $83 a month.
New home sales
Interest rate hikes similarly may not have a significant impact on new home sales. Home buyers may not immediately feel the increase in monthly instalments due to the progressive payment schedule for new-launch private properties, and home loans tend to be smaller in the initial repayment period.
For a new property purchase, buyers pay the first 20 per cent through cash and Central Provident Fund savings. The bank loan or first interest repayment starts six months later, while the second and third repayments occur about one year and 11/2 years later.
For a $1.5 million private condo unit with a loan tenure of 25 years and 75 per cent LTV, borrowers face a marginal increase of $27 a month for the first scheduled payment, followed by $80 and $106 a month more for the subsequent two payments if interest rates increase from 2.3 per cent to 3 per cent.
Borrowers may experience a monthly increase of about $318 a month when the project obtains its temporary occupation permit (TOP) around three to four years later. By that period, the borrowing climate may have changed. Home owners can refinance their packages or lease out their units to offset the higher monthly mortgages.
Other private homes
As the interest rate rises, mortgages will increase in tandem with a more significant loan quantum.
The monthly instalment for a $1 million private property on a 25-year loan tenure and 75 per cent LTV rises by $267 a month from $3,290 to $3,557 monthly when rates move from 2.3 per cent to 3 per cent. For a $3 million purchase under the same loan tenure and LTV, the increment spikes by $801 a month from $9,869 to $10,670 monthly for the same interest rate increase.
Therefore, we may expect more borrowers to refinance or pay down their loans, especially for mid-range or pricier properties. Although restructuring loans or early loan redemption can come with a penalty fee, some borrowers may still find it cheaper to pay the fees compared with the monthly mortgage increase.
The super luxury market may not be as affected on the upper end of the housing spectrum since affluent buyers may not need a housing loan. Others can raise finances by rebalancing their investment portfolio and reallocating funds to mitigate the impact of the higher borrowing costs.
When will rate hikes hurt
The interest rate impact may be more keenly felt when rates move above 3.5 per cent, the interest rate used for the TDSR calculation. According to a study by the Institute of Real Estate and Urban Studies at the National University of Singapore, if mortgage rates move beyond 3.8 per cent, the housing affordability for first-time home owners in the top 30th income percentile may be affected. Most may not be able to afford a new private property on a 25-year loan tenure.
Their affordability threshold for private resale homes will similarly be breached when interest rates rise to around 4.6 per cent. If they take a 20-year loan tenure, the threshold slides to 2.5 per cent for new private homes and 3.5 per cent for resale homes.
Buyers' housing affordability may also be affected when the TDSR computation is revised. When interest rates inch towards 3.5 per cent, the TDSR computation may be tightened, which will adversely impact the purchasing power of all borrowers.
For instance, if the TDSR calculation uses a 4 per cent interest rate, the maximum loan for borrowers with a $10,000 household income on a 30-year loan tenure will be reduced from $1.23 million to $1.15 million. Therefore, a buyer can purchase a property only up to a value of $1.53 million instead of $1.63 million without an additional cash outlay.
If the rates are revised to 4.5 per cent, the maximum loan quantum will drop to $1.09 million, and the maximum purchase price will be $1.45 million. Therefore, with lower borrowing power, buyers will have to settle for a smaller unit or incur greater cash outlay if the TDSR is tightened.
Nevertheless, our property market may withstand the interest rate impact better than those in many other countries. Speculative activities are low, and many safeguards are in place to ensure most borrowers are not overleveraged. Moreover, the aggressive rate hikes are likely to be temporary. Interest rates may revert to normalcy once inflation comes under control.
For buyers who purchase properties for investment, the rental income can offset the mortgage increases after TOP since rents have been on an uptrend in recent years.