While most of Singapore was sleeping, the US Federal Reserve raised its interest rates yet again. Know to the common man as “The Fed”, the whispers of interest rate hikes have been swirling around the financial sector for awhile now.
The latest hike is the fourth since March this year. In July, we saw interest rate increase by another 0.75 points from 1.75% to 2.5%. The move was a bid to control inflation. This September, we saw another 0.75 points hike, bringing us to a current Fed interest rate of 3% to 3.25%.
The United States might be 15,549 kilometers apart from Singapore but the decisions made by the financial institutions there cause a ripple effect here given just how closely our economy is tied to that of its global counterparts. If this all sounds like Greek to you and all you really want to know is how it affects you directly, read along. Here’s the breakdown of what the FED’s interest rate hike means for you
The Fed essentially controls the interest rate in which institutions borrow money at, and after the massive housing and banking sector crash of 2007-2009, they lowered the cost of borrowing to near rock-bottom levels in a bid to stop the US economy from plunging into another Great Depression. To put it simply, institutions needed money to stay afloat, and this lowered interest rate made funds a lot more accessible.
The current interest rate increase comes at a time where the Fed feels that it is an essential move to lower the inflation rate. Inflation rates are soaring around the world largely due to post-pandemic demand and the ongoing war between Ukraine and Russia. In America, inflation is increasing in a faster pace than it has in the last 40 years.
To curb inflation, the Federal Open Market Committee (FOMC) increased the level of its benchmark fees in July 2022 to a range of 2.25% to 2.5%. This was expected to further increase to 3.4% in the next 6 months with subsequent hikes expected later in the year.
Today, in September, the Fed increased its interest rates by 0.75 basis points to 3% to 3.25%.
Right about now, you might be wondering why we are even talking about something that’s going on in the US. In the past, Singapore home loan interest rates were pegged to the Singapore Interbank Offer Rate (SIBOR). SIBOR was the cost of funds for a foreign bank to bring in money (in USD) which was usually dependent on the US interest rate.
However, SIBOR is currently being phased out. The 6-month SIBOR was discontinued on 31 March 2022. The more commonly used 1-month and 3-month SIBOR is due to stop after 31 December 2024.
All new home loans in Singapore are now benchmarked by the Singapore Overnight Rate Average (SORA). SORA is defined as the volume-weighted average borrowing rate in Singapore’s unsecured overnight interbank cash market. In layman terms, it’s the interest rate that banks in Singapore have transacted to each other on a day to day basis. The changes to the US Fed Funds Rate have global repercussions, including an effect on the SORA.
For many Singaporeans who might have taken their home loans during the market drop in the thick of the pandemic in 2020, interest rates were at an all-time low. Since then, things have obviously changed drastically and this has a very direct impact on the home loans that Singaporean homeowners are currently servicing. For instance, 3M SORA interest rate in January this year was 0.194%. The 3M SORA as at 29 July 2022 is 1.2295%. Today, the 3M SORA interest rate in September 2022 is 1.596%.
Needless to say, you can expect a gradual increase in SORA over the next 6 months, which will in turn affect SORA-linked home loan packages.
While fixed rate packages usually have higher interest rates than floating interest rate packages, people still gravitate towards these packages because of the complete lack of any fluctuations during the time period in which the fixed interest rate applies. It’s important to consider your finances when refinancing into a fixed rate package earlier rather than later because of the rising interest rate environment.
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