Interest rates to go up in 6 months' time?

Interest rates in Singapore may rise - from their lowest levels in 40 years - as early as March next year, according to analysts.

They say home loan refinancing is surging, but bank profitability and the rising cost of funds offshore may force the banks' hand.

Banks could be forced to raise their home loan interest rates as early as six months from now.

Low rates have hurt their profitability and they will not bear the razor-thin margins for ever.

Dennis Ng, CEO of HousingLoanSg.com said: "Banks may be forced to increase the interest margin on their housing loans. (With the three-month SIBOR at 0.35 per cent, even if they add in an interest margin of 0.6 or 0.7%, the total interest rate would be about one per cent - and that, to a lot of banks, means that profitability is affected."

This means that home loans, which are currently in the range of 1 to 1.2%, may go up as much as 0.3 percentage points by early next year. That is even if the Singapore Interbank Offered Rate, or SIBOR, component of home loans remains low.

Banks such as UOB, DBS and Maybank have stopped offering Swap Offered Rate (SOR) pegged loans as SOR rates turned negative earlier this year, while foreign banks have to deal with potentially higher borrowing costs offshore.

Tai Hui, regional head of research, SE Asia, Standard Chartered Bank, said: "It's also worth noting that the low interest rate environment will not last forever, even though it may be for the next year or two.

"So I think it's interesting to find an opportune time to lock in low interest rates once we start to see some degree of stabilisation and some degree of return in confidence."

The low interest rate environment has fuelled a resurgence in home loans refinancing.

According to loans consultancy HousingLoanSG, home loans refinancing rose 30% in the first half of this year, compared to the same period a year ago.

Borrowers have been particularly attracted to packages that protect them from future SIBOR increases. For example, DBS Bank has a loan pegged to the three-month SIBOR, with a spread of 0.85% for the first three years. This means that the interest rate is capped at 1.49% for the first three years.

It is loans growth that is keeping banks profitable and not the rates they charge, which is giving borrowers an unrealistic sense of cheap money.

Analysts say a better gauge of affordability is to factor in rates of 3 or 4% - an indication of where rates are headed as early as next year.

Source: Channel News Asia

Those who have been following our blog will know that the wife and I are skeptics about the sustainability of the current low interest rate environment. We have also raised concerns about possible rate hikes in the foreseeable future. It looks like even the analysts are singing the same tune now.

Some may argue that a 0.3% increase is peanuts given the low rates that are still being offered by our banks. However, such "small" increases will stack up pretty quickly once the banks decide to move their rates up every couple of months...
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