I just received a notification letter from my bank recently about the change in my housing loan interest rate, which is calculated in my case as 3-mth SOR + 1%. You can refer to this MoneySmart article about the difference between SIBOR and SOR. It also shows the SIBOR vs SOR historical chart, which I have included here for the fun of it.
I follow the 3-mth SOR orange line closely simply because it directly affects my housing loan interest rate. And my monthly housing loan instalment payment happens to be my biggest expense every month. Sometimes, I compare it to the 3-mth SIBOR blue line just to see whether it would have been better to go for a SIBOR based housing loan.
Turns out the 3-mth SOR orange line has been staying below the 3-mth SIBOR blue line so far for longer periods of time than having been above it. This is from 2011 and 2017 i.e. the 6 years I have had the housing loan. The most recent adjustment this month in Jun 2017 is from 1.90685% to 1.73565%, which lowers my monthly instalment from S$3,237.60 to S$3,187.02. About S$50 less.
The next adjustment should be 3 months later and I reckon it’s more likely to go up than down. Oh well, one can hope. Look at what happened between Sep 2015 to Mar 2016. The 3-mth SOR orange line went up sharply above 1% and stayed there for a few months. I don’t like spikes in my housing loan interest rate and monthly instalment payment. Reason being we pay S$1,000 of the monthly housing loan instalment payment from our CPF Ordinary Accounts and the remaining amount in cash.
Sudden increases in the 3-mth SOR can impact my monthly cashflow negatively. Of course, I know it’s a matter of time before the 3-mth SOR trends towards a more normal rate of about 3%. The longer this takes to happen, the more ready I am for its effects as I have more time to prepare.
I got inspired after reading this post by Mr Money Mustache – Great News: There’s Another Recession Coming. It describes the recession cycle well and how you can prepare to take advantage of the next recession in layman terms for easier understanding. Of course, it’s much more difficult to do than to read. If you look at his list of fair weather preparations, we have only been meeting half of them.
I don’t like going through a recession. It’s tough to get a read on how severe it can get and even tougher to plan & execute your investing actions accordingly. You usually end up pulling the trigger too early or waiting until it becomes too late. I believe the key for salaried employees like us is to do everything we can to avoid getting retrenched during the recession.
As long as we don’t lose our jobs and stay mentally & physically health, we have the opportunity to navigate the recession successfully and build wealth. The moment either or both of us gets retrenched, I doubt that’s going to work. But who knows. Anything can happen.
Yup, maintaining your job is the prime importance during recession, or at least the ability to get another similar-paying job relatively fast. That’s why those with iron rice bowl jobs love it whenever there’s a recession. They have the means & job assurance to go in big on good assets at depressed prices. And this is also why property market won’t have sharp drastic drops unless unemployment reaches a significant percentage.
Personally I would say that my biggest capital gains were made when I was still working in the civil service during Asian Financial Crisis & dot.com/SARs period when I was still below 35. Although having to endure a salary about 40% lower than my high-flying peers in the private industry, but civil service job security (at that time) allowed me to deploy 95% of my liquid assets to pick up blue-chips (US & local) and a prime freehold property on the cheap. Most of my high-flying peers were in siege mode & hunkered down worrying about their jobs & paying for their overpriced D9 and D10 properties during 97/98 and from 2001 till 2004 (at that time jobs lagged economy by 6-12 months, today maybe shorter).
Unfortunately, govt has realized that having iron rice bowl “permanent” employment contracts is a big drag on govt funds during bad recessions. So from SARs period, most of civil service jobs have been downgraded in terms of job security. Majority of new hires are now on renewable 2-yr or 3-yr contract terms. Only those old birds who got in before 2003, or those elite white horses will still enjoy strong job security.
For those working in economically sensitive sectors like finance, commodities, property etc, basically need to hedge for the bad times. Standard practice is of course having bigger emergency funds — e.g. able to cover 2 years’ worth of expenses.
The other method which almost nobody uses is the anaconda approach — do nothing 90% of the time. Live well below your means during the good times e.g. stay in BTO or lower-price resale HDB. Accumulate cash & low-risk assets like crazy (or if in risky assets like equities, then having a method to get out before the big downturn). When big recession hits, let it play out & start hunting for good deals. Unfortunately, you’ll be an outsider & maybe laughing stock among your peers for many many years, before it pays dividends.
Yes, it’s only when there is no drastic drop in your income during a recession that you can execute your investment plan effectively to pick up quality assets at depressed prices.
Yup, civil services jobs used to be more secure and that allowed for those civil servants with “iron rice bowls” to purchase properties at cheaper prices. Good job to you on doing that!
Haha, yes, I realise my sector is economically sensitive and decided to allocate larger emergency funds to give me the peace of mind and stability to execute the investment plan properly.
That anaconda approach/method is tough. Especially in such a digitally advanced age to keep away from the financial and property markets. Plus you still need to know and work out the entry points in the event of a big recession after not tracking those markets for a long time.
Not sure why you don’t have a fixed rate mortgage? Seems like their is a lot of risk in a loan that is indexed to the current inter bank rates and I did not think fixed rate loans were hard to get in our current low interest rate environment?
I haven’t looked into refinancing my mortgage from a floating rate to fixed rate. Any idea what the current rate is like on a fixed rate mortgage? Is it lower than 1.73565%?
I had my floating rate mortgage since 6 years ago. It was 3-mth SOR + 0.75% for the first 4 years before going up to 3-mth SOR + 1% from the 5th year onwards. Might be able to get a better deal now if I try repricing my mortgage!
I’m not sure what fixed rates look like. I paid my mortgage off 15 years ago and haven’t borrowed a penny since. I am just speculating that at the historic low interest rates we have now that locking then on for the life of the loan would be a smart option.
Yup, it’s hard to lock in the fixed rates for a long time here in Singapore because they become floating rates after a few years. Something that I’m just starting to learn about. Good that you have no more loans and don’t have to worry about interest rates rising.
http://www.redbrick.sg/blog/mid-year-update-property-financing/
Overview of mortgage rates as of June 2017 : Fixed, Sibor-based, FD-based.
Obviously fixed rate will always be higher than variable rates. Good if rates keep going up over 2-3 years. But I have doubts that the US rate hikes can last longer than 1 more year.
Unlike US or some other countries where you can have REAL FIXED 15-yr or 30-yr mortgage rates, Singapore does not. Singapore banks just guarantee for 2-3 years and after that they will simply use whatever is the market rate. So to me, fixed rates in S’pore are as good as variable.
SOR has been going down over past 6 months due to weakness in USD/SGD. However over next 6 months or so, USD/SGD may start to strengthen…
Anyway the BIG difference in mortgage rates is the spread or margin that different banks apply, so just shop around.
Yeah, I heard about fixed rate mortgages only being that way for a few years become they become floating rate in Singapore. Does that mean homeowners have to continue refinancing to keep the mortgages at fixed rates? Sounds like a way for banks to earn more fees when you refinance.
Anyway, I reckon our spread/margin of 1% is quite high in the current environment. Might start shopping around to see how competitive the other banks are!