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US Fed rate cut: What it means for your investments, savings and loans
Here’s how the shift in interest rates could affect your money, and the steps you can take to stay ahead
Rate cuts are generally good news for investors as lower borrowing costs can bolster the economy and financial markets.
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Genevieve Chan, Brand Newsroom
For the first time in four years, the US Federal Reserve has slashed rates, bringing it down by half a percentage point to a range of 4.75 per cent to 5 per cent.
The move, announced on Sept 18, sent global markets rallying. Stock indices, including the Dow Jones Industrial Average and the S&P 500, closed at record highs the following day.
But as markets react to this shift, the question for the average Singaporean is: What does this mean for my money? Do I have reasons to cheer, or cause to fret?
“In a changing rate environment, the average person needs to adopt smart financial strategies to make the most of the evolving interest rate landscape,” says Mr Abel Lim, head of wealth management advisory and strategy at UOB.
This is especially true in Singapore, he adds, where policies and economic factors are heavily influenced by global financial trends.
Here’s how the rate cut would affect you as an investor, saver and borrower, and what you can do.
What this means for investors
Rate cuts are generally good news for investors as lower borrowing costs can bolster the economy and financial markets. But context matters, says Mr Lim.
If interest rates are cut due to a recession, investors may be cautious and financial markets could become volatile, he explains. “On the other hand, financial markets perform comparatively better when interest rates are cut without a recession happening.”
UOB anticipates the latter scenario, he says, predicting positive outcomes for global financial markets over the next year.
Mr Lim suggests four investing strategies in this changing environment.
- Income investing: Consider investment-grade bonds (which are issued by companies with strong credit ratings) and stocks that pay reliable dividends. If you’re looking for local dividend-paying opportunities, you can also explore real estate investment trusts (Reits), which let you invest in properties like shopping centres and hotels.
- Diversification: While big tech companies have been doing well for nearly two years, the market can change. Having a mix of different investments in your portfolio can help protect you from volatility.
- Quality stocks: Look for companies that consistently generate revenue and hold a strong position in their industry. These companies tend to be more stable and can better manage economic ups and downs.
- Asian stocks: These typically attract more foreign investment when interest rates go down, observes Mr Lim. Demand for goods and services in Asia remains strong, he notes, and some countries in the region are building infrastructure needed for artificial intelligence and benefitting from the shifts in global supply chains, which could lead to more growth.
When to review and rebalance your portfolio?
MoneySense, Singapore’s national financial education programme, recommends reviewing your investment portfolio once every six months and rebalancing if needed. Keep your goals and current financial needs in mind when doing so.
As interest rates decrease, bond yields may also fall. Mr Lim suggests reassessing asset allocation. Consider increasing your exposure to dividend-paying stocks or Reits, which may offer higher returns in a lower interest rate environment.
Understanding market trends can help you make better investment decisions.
The UOB TMRW app, for example, provides wealth insights like regular financial market views and analysis to “help you make sense of global events, stock and bond movements that may affect your investment journey”, says Mr Lim.
Those who prefer more support can seek financial advice from a professional. “UOB bankers, supported by a team of specialists, are equipped with the expertise and digital wealth tools to assist customers in building their wealth portfolio tailored to their risk tolerance,” he adds.
This includes UOB’s proprietary Portfolio Advisory Tool (PAT), which provides data-driven insights to help you optimise your portfolio according to your risk profile and UOB's key investment recommendations.
What this means for savers
Savers face a different reality. Falling interest rates usually lead to lower returns on savings accounts and fixed deposits.
To counter this, Mr Lim recommends exploring investment opportunities, such as unit trust funds, exchange-traded funds (ETFs), bonds, and stocks to potentially earn higher returns.
It’s important to understand your investment horizon, risk appetite, and the investment product’s features, terms, benefits and risks before investing, advises MoneySense.
Singapore Savings Bonds (SSBs), which are fully backed by the Government and offer interest rates that adjust to market conditions, is another option.
“It is a smart move to lock in the yield from SSBs while the interest rates are still relatively high,” says Mr Lim.
The October tranche of SSBs offers an average return of 2.77 per cent a year if you hold it for 10 years.
What this means for borrowers
Lower interest rates could spell relief for borrowers, whether you’re looking to buy a home or need a loan for large expenses.
Home owners who have high mortgage rates can also consider refinancing. “Typically, as interest rates fall, a floating-rate mortgage can provide the most savings potentially as compared to fixed-rate loans,” says Mr Lim.
However, fixed-rate mortgages are currently priced lower than floating-rate mortgages, he notes. “These come with attractive features, yet give added protection over a period of two to three years should interest rates rise unexpectedly.”
Fixed-rate loans keep the same interest rate during the lock-in period, while a floating-rate mortgage changes based on a reference rate. Some fixed-rate packages also let you switch to a different loan package within the same bank during the lock-in period, which is called repricing.
The main reference rate for floating-rate mortgages is the Singapore Overnight Rate Average (Sora).
“Home owners may also refinance into a shorter-term mortgage without substantially increasing monthly payment,” Mr Lim adds. This lets you pay off your loan faster and save more on interest.
When refinancing or taking on a new loan, it's important to keep the total debt servicing ratio (TDSR) in mind. TDSR is the limit of how much you can borrow.
If you're living in a Housing Board flat and your loan is from a bank, you'll also need to consider the mortgage servicing ratio (MSR). The MSR applies in addition to the TDSR. Both TDSR and MSR are Monetary Authority of Singapore (MAS) regulatory requirements.
So how do you calculate? For TDSR, your monthly debt obligations, including home and other loans like credit card, should not exceed 55 per cent of your gross monthly income.
For MSR, your property loan payments, including the loan you're applying for, should not exceed 30 per cent of your gross monthly income.
“Consulting a financial advisor for a balanced and well-informed approach to both borrowing and saving can help ensure long-term financial stability during this period of economic adjustment,” advises Mr Lim.
Rethink Your Wealth is a series that provides practical insights and answers on wealth-related topics, to help you transform the way you approach finances.
This is the second of a nine-part series in partnership with
Please note that the views expressed in this article do not represent financial, investment or legal advice.
