Navigating Rising Interest Rates: A Guide to Financial Prudence in Home Purchases

In recent times, there has been growing concern about the impact of rising interest rates on homeowners. Minister of State for Trade and Industry, Alvin Tan, urges borrowers to exercise caution when purchasing homes and emphasizes the importance of financial prudence. In this blog post, we will explore the key points highlighted by Mr. Tan back in April 2022 and provide valuable insights on how to navigate the potential challenges posed by rising interest rates.

The Need for Caution: While Singapore's household debt situation is generally healthy, it is essential to recognize that a small segment of highly-leveraged households may face increased constraints with rising interest rates. Therefore, it is crucial for all borrowers to approach home purchases with careful consideration to avoid potential financial strain in the future.

Manageable Mortgage Servicing Ratio: According to the Monetary Authority of Singapore (MAS) stress tests, the median household mortgage servicing ratio is expected to remain manageable even under scenarios of significantly higher interest rates or lower incomes. This indicates that most households should still be able to service their mortgages as domestic interest rates align with global rates.

Prudent Borrowing and Debt Management: Mr. Tan highlights the importance of prudence in borrowing, particularly as interest rates are expected to rise in the coming years. Singaporean households have generally demonstrated the ability to service and manage their debts effectively. Measures such as the Total Debt Servicing Ratio (TDSR) have been implemented to ensure borrowers' monthly loan repayments for property mortgages do not exceed 55% of their monthly income. The credit profile of mortgages remains healthy, with delinquent mortgages at less than 1%.

Financial Resilience Measures: The MAS has implemented various measures to ensure households are financially resilient. For instance, the interest rate used to calculate loan repayment for residential property under the TDSR is set higher than prevailing interest rates, providing a buffer for borrowers to service their mortgages across an interest rate cycle. Loan-to-value limits and restrictions on loan tenure also encourage greater financial prudence among borrowers.

Business Outlook and Economic Recovery: Mr. Tan also acknowledges the impact of rising interest rates on businesses, particularly highly-leveraged companies with low profit margins. However, the broader economic recovery is expected to provide some reprieve as Singapore opens up and emerges from the pandemic.

Conclusion: As interest rates continue to rise, it is crucial for prospective homeowners to exercise financial prudence when purchasing a property. By carefully considering the potential impact of rising interest rates and ensuring manageable mortgage servicing ratios, individuals can navigate these challenges and safeguard their financial well-being. Consulting with financial advisors and staying informed about the latest developments in the housing market will enable borrowers to make informed decisions and secure a stable future amidst changing interest rate environments.

Bank Savings Account Interest Rates and Singapore Savings Bond

The interest rates for the flagship savings account of the 3 local banks have gone up.  As of 1 November 2022, the interest rates are as follows:

UOB One Account- 3.6%

DBS Multiplier Account- 4.1% 

OCBC 360 - 4.65%

Meanwhile, Singapore Savings Bond (SSB) 10 year average interest rate of the December tranche  = 3.47%

Which one is more attractive?

I think the SSBs are a good long term holding.  While the interest rate seems less,  you don't really have to jump through any hoops or fulfill any spend/save/salary kind of criteria to earn the higher interest rates. 

Given how the SSBs were oversubscribed in the last tranche,  I think I will opt for a 10k sum for this tranche. 

OCBC 360 Account Offers Incredible Interest Rates of over 3%

Recently, I posted about opening a DBS multiplier account that offered interest rates of over 2% depending on your cashflow with the bank.

It now seems that OCBC has up the competition by offering a similar account that offers interest rates up to 3.05% . OCBC 360 account seems attractive as the bonus interest rates are also much more achievable.

To get the bonus interest rates, I will just need to credit my salary, carry out 3 bill payments, and charge $400 to an OCBC credit card. Each of the above gives a bonus interest of 1%. Together with the base interest of 0.05%, it adds up to 3.05%.

I think the offer from OCBC seems to be too good to be missed. Opening my account with them definitely.

Why I signed up for the DBS Multiplier Account

I recently signed up for the DBS multiplier account because of the higher interest rates that were offered compared to a normal savings account.

The process of opening the account was fuss free as everything was done online through internet banking.

Basically, the account offers a higher interest rate depending on the cashflow of that account. The cashflow is limited to a few items (e.g. salary), and various tiers of higher interest is offered if the cashflow exceeds different levels.

Considering that I had spare cash in another account, it made sense to just open the account and earn a higher interest rate for the time being. Besides, the interest is paid monthly!

Why Interest Rates Rise

Interest rates of bonds are rising in the bond market. That means that people are more confident in the economy. Why is there this correlation?

The Federal Reserve Chairman Ben Bernake says he does not expect the US economy to fall back into another recession.

This boosts people's confidence in stocks and thus reduces the demand for safer investment instruments like bonds and treasury notes. In order to attract investors to bonds, the issuers of bonds thus need to raise the interest rate or coupon rate to make it competitive and lucrative enough for investors to invest in them. Otherwise, these investors would rather invest their money in the stock market.

Hope this provides a simple explanation on why interest rates rise when the economy is doing well.

Question:
As interest rates rise, can we also expect the interest rates or deposit rates in our banks to rise?