Home loan interest rates creeping up, spike feared

Increase is small so far, but spike feared as global economy improves

Home loan interest rates have risen marginally over the past half-year as banks seek to shore up profit margins amid low market rates, industry observers told The Straits Times.

But although the increase so far has been small, and overall interest rates remain at historical lows, the worry is that market interest rates could shoot up over the coming months in tandem with improving global economic conditions.

Banks usually peg their mortgage rates to a market rate, which is usually the Singapore Interbank Offered Rate (Sibor), and sometimes the Swap Offer Rate (SOR). They then tack on a premium. Borrowers are typically locked in to these rates for at least three years.

After factoring in changes to both the market rates and premium rates, overall interest rates have risen by 0.17 to 0.27 percentage point across all banks here since January, said Mr Desmond Chua, head of online home financing service LoanGuru.com.sg

Mr Alfred Chia, chief executive of financial advisory firm SingCapital, which specialises in mortgage refinancing, said average premiums went up from 0.7 per cent in January to around 0.85 per cent last month. He added that the biggest jump he saw was by more than 0.4 percentage point.

A 0.4 percentage point jump means that monthly instalments for a $1 million loan on a 20-year tenure could rise by $185 - from about $4,635 to nearly $4,820 - assuming a constant three-month Sibor of 0.38 per cent, and a premium initially set at 0.7 per cent.

The three-month Sibor began the year at nearly 0.38 per cent, and is now around 0.373 per cent. OCBC economist Selena Ling expects it to rise to 0.39 per cent by the year end.

Banks are facing lower interest earnings after a raft of government curbs on the property and car markets, in January and February respectively. Industry observers said banks may try to make up for this by raising interest rates.

Car loan interest rates leapt last month - after curbs in February on car loan amounts - from 1.88 per cent a year to 2.68 per cent across almost all banks here.

Home owners said their main concern now is whether Sibor rates could suddenly spike due to external factors such as an improvement in the economic situation in the United States.

"I am worried about whether the Sibor will go up," said education officer Nahar Azmi, 42. He refinanced the mortgage on his District 15 terraced house early this year, with a $881,000 loan on a 25-year tenure. It is pegged to the three-month Sibor with premiums starting at 0.6 per cent.

The US Federal Reserve may taper its quantitative easing - a technical term for printing money - which would effectively end the ultra-low interest rate environment there. Concerns over this have played out in how the closely watched US Treasury 10-year bond yield shot up to as high as 2.23 per cent late last month, up from about 1.6 per cent as at the end of April.

But even if the Sibor stays low, market watchers said overall mortgage rates may still rise as banks try to boost profit margins.

"If the Sibor stays low until US unemployment improves... all the banks here know that to grow margins, they have to increase premiums," Mr Chia said.

LoanGuru's Mr Chua added that banks have stopped offering mortgages pegged to the one-month Sibor since February this year.

The one-month Sibor rate has been lower than the three-month Sibor rate for the past year. Both are still near historical lows.