Fixed rates for home loans are down and likely to fall further, experts say

SINGAPORE: Interest rates on home loans have been declining since the start of the year and observers expect the trend to continue.

Fixed-rate home loans – which have interest rates that remain unchanged throughout a lock-in period – shot up past 4 per cent last year in Singapore, as the US Federal Reserve went on a rate-hike race to quell surging inflation. 

With the Fed poised to pause or even reverse policy tightening, banks have been cutting their rates on these loans, industry experts said.

DBS, Singapore's largest lender, is offering fixed-rate packages at 3.75 per cent a year with lock-in periods of two to five years, a check of its website on Tuesday (May 30) showed. 

This is 0.5 percentage points lower than the 4.25 per cent offered by the bank in January.

At OCBC, two- and three-year fixed-rate mortgages are priced at a “promotional” 3.8 per cent. These loans were previously set at 4.25 per cent and 3.9 per cent respectively in January.

The rate for the bank’s one-year loan remains unchanged at 4.3 per cent.

UOB did not provide its rates when approached by CNA, but property portals listed its two- and three-year loans at 4 per cent per annum, down from last year’s peak of 4.5 per cent.

Among foreign lenders, HSBC has lowered its two-year fixed-rate mortgage to 3.6 per cent, while the three-year equivalent is set at 3.5 per cent.

Both packages were previously offered at 4.25 per cent in January.

Mortgage advisory firm Mortgage Master said loan rates are going as low as 3.38 per cent, although it declined to say which bank was offering the rate, citing privileged information.

“With inflation and employment data in the US softening, the US Federal Reserve has indicated a less hawkish stance,” said Mr Paul Wee, vice-president of PropertyGuru Finance. “Hence, it is likely that fixed rates will soften further.”

NO CHANGE IN FLOATING LOAN RATES

Fixed-rate mortgages tend to see bigger adjustments as banks weigh their hedging costs, experts said.

Hedging costs depend on market expectations for interest rates, with the cost going up as rates rise and vice versa, said Mr Wee.

Hedging does not apply to floating-rate home loans – where interest rates vary throughout the life of the loan – as any increase is passed on to consumers.

For now, banks have largely left their floating-rate offerings unchanged. All three local banks' home loans are pegged to the three-month compounded Singapore Overnight Rate Average (SORA).

DBS' package is based on the SORA plus 1 per cent, OCBC's is SORA plus 0.98 per cent, and UOB's loan is SORA plus 0.7 per cent for the first two years and 0.8 per cent after.

The three-month compounded SORA has risen from 3.0166 at the start of the year to 3.6171 on Tuesday. This means that UOB's rate is lowest at 4.3171 per cent, followed by OCBC at 4.5971 per cent and DBS at 4.6171 per cent.

Although fixed home loan rates are more attractive now, home owners have to consider interest rate movements ahead, mortgage experts said.

“Fixed-rate packages typically have a minimum lock-in period of two to three years, and markets expect interest rates to begin declining from the end of 2023,” said Mr Wee.

“This means that interest rates could drop below current fixed rate levels.”

Instead of going for the lowest fixed-rate home loan with a commitment period of three years, Mortgage Master’s head of business operations Lu Chen Guang recommends that home owners pick loans with fixed rates for one or two years given expectations for the Fed to cut rates by 2024.

He noted that some banks are even offering a two-year fixed-rate home loan with the flexibility of converting to a floating rate after the first year.

“Because each home owner’s financial situation and risk appetite is different, we recommend comparing the various home loan packages that banks are offering before deciding on one,” he added.

At the end of the day, home owners must exercise prudence and consider their own risk profiles and life plans before taking up a loan, the experts said.