Interest Rates and How It Affects Borrowers

In recent months, interest rates have been falling. If the country's economy is doing well, interest rates are likely to go up.

Singapore's Loans and Interest
Lending rates saw an all time low in year 2004 for Singapore. Some banks are even lending at 0.5% for the First Year of the housing loan.

Interest rates starts climbing towards late 2004 and saw a massive climb in 2005 and 2006 before easing off in 2007. At the peak in recent years, lending rates were at 4% 3 years Fixed Rate. A lot of borrowers were caught with their existing Lock-in or Claw-back where they will be penalized for re-financing (including redemption) their loan with another bank.

Some borrowers even saw interest rate escalate to 5.75%. In Singapore, interest rates are one of the lowest among developed nations.

Property Boom (Singapore)
Since middle of 2006, property in Singapore started appreciating in value with the steepest climb seen during the period of May - August 2007. New developments that were asking for $600 psf in early 2006, were asking for as much as $1,500 psf in August 2007 (psf refers to Per Square Feet). Some condominium projects (in town) that were launch around middle of 2007 were even asking for around $3,000 psf.

Prices for subsidized housing (two-thirds of total housing in Singapore) had climbed high as well. A 5-room flat (5-room flats are just a classification of the flat type) in some areas were selling at valuation in early 2006 but were asking for $100,000 above valuation by 4th Quarter of 2007. Typical prices for such flat type are currently selling at about $400,000 to $500,000 per unit (usually 1,300-1,450 sqft).

Falling Interest Rates and Refinancing
Interest rates have fallen since middle of 2007 as banks compete to secure more loans during this period of property boom. Interest rates are affected by SIBOR (Singapore Interbank Overnight Rate) rates. Instead of increasing rates due to economy boom in recent years, the SIBOR rates have fallen to about 1.74% (3 months average).

Borrowers who had taken loan in recent years are now facing higher interest rate. Should they refinance or continue paying high rates? What are the trends of the interest rate movement in the coming months?

In order to refinance, banks looks at the borrower's credit rating. A borrower with bad rating are usually not granted a loan with the banks. As such, this category of borrower will find it hard to refinance.

What is the possible trend in the coming months? Interest rates will not continue falling. But at which point will rates start going up? The uncertainty could be influenced by many factors including micro and macro economy, liquidity in the economy, etc.

With the current economical situation in America, with the potential of going into a recession (negative signs since months ago), global economy will be affected. However, interest rates have already fallen so much since September 2007 (was 5.25% till 17 Sept 07), is there room for more reduction?

From the looks, interest rates (in Singapore) are likely to go up in the coming months. Before deciding on the types of packages to take, borrowers should consider which type of packages are suitable for them. Rather than going to the bank, a Mortgage Consultant would be in the best position to present to borrowers the many banks' packages and helping borrowers narrow down on what is suitable for them.

America's Loan Interest
In America, with the sub-prime and credit crunch issue, it leaves many borrowers in dire straits of not being able to pay off their loan and the banks coming after them. The latest Fed Reserve rate adjustment downwards by 0.5% comes as a relieve to many. Is it time to refinance?

Many borrowers are in desperate situation of needing to lower their interest rate in order to be able to afford and continue servicing their loan. However, with many borrowers having defaulted payments in the last year, this leaves many unable to refinance. For this group, if they are able to make large attempts to make prompt payment in the next 6-12 months, it may help them to get approval.

Those who have been able to continue paying promptly may wonder, is it time to refinance with the current rates? Fed Reserve have hinted that they will continue cutting rates if economy continue showing signs of decline (source : http://money.cnn.com/2008/01/30/news/economy/fed_rate_decision/index.htm?eref=rss_topstories)

Borrowers who have made prompt payment and able to refinance should consider if they can afford to continue paying the current rate. If they are struggling to keep up, it is time to act and cut rates. If they are comfortable with the current high rates, it is their call if they want to wait awhile longer for another cut (which is unpredictable).

Effects of Rate Cuts
Rate cuts had be inevitable as the economy faces a meltdown. The economical situation had been worrying, with businesses and consumers facing the squeeze. Weaknesses are seen in housing and job market, manufacturing and job creation faced a decline as well.

Rate cuts are aimed to help promote moderate growth over time and to mitigate the risks to economic activity and downside risks to growth remain, Fed Reserve statement said.

The other big concern of rate cuts, Inflation. Much remains to be seen.