Categories: world

Comment: Consumers feel the gap of rising interest rates

SINGAPORE: After four interest rate hikes in 2018, the US central bank announced that interest rate hikes would be put on hold, due to weak inflation and slower growth in Europe and China. This must be music for many ears, interest rate hikes over the past year have had consequences for investors around the world, including Singapore. Ad Unlike other countries where lending rates are typically dictated by the central bank, interest rates in Singapore are determined by Singapore Interbank Offer Rate or SIBOR. Changes in interest rates in the US will affect SIBOR in Singapore, which in turn affects local mortgage loans. LOW INTEREST RATE FOR NEXT DECADE ] Previously, Singaporeans have had very low bank rates for almost a decade – close to 1 percent. This is truly remarkable for consumers seeking bank financing. Advertisement Advertisement The low interest rates have meant that many have been able to get a mortgage loan for close to 1.5 per cent, finance a car, and perhaps even get a small business loan at very low prices at the same time. READ: Succeed in your career, sit down, buy a BTI. Is this Singaporean dream obsolete? One comment During the past year, however, these rates have risen and now they are close to 3 per cent. It obviously has consequences for consumers who have existing loans or intend to take out new loans. Consumers who have money do not need to borrow money. But those who are liquidity-limited, or do not have…

SINGAPORE: After four interest rate hikes in 2018, the US central bank announced that interest rate hikes would be put on hold, due to weak inflation and slower growth in Europe and China.

This must be music for many ears, interest rate hikes over the past year have had consequences for investors around the world, including Singapore.

Unlike other countries where lending rates are typically dictated by the central bank, interest rates in Singapore are determined by Singapore Interbank Offer Rate or SIBOR.

Changes in interest rates in the US will affect SIBOR in Singapore, which in turn affects local mortgage loans.

LOW INTEREST RATE FOR NEXT DECADE ]

Previously, Singaporeans have had very low bank rates for almost a decade – close to 1 percent. This is truly remarkable for consumers seeking bank financing.

The low interest rates have meant that many have been able to get a mortgage loan for close to 1.5 per cent, finance a car, and perhaps even get a small business loan at very low prices at the same time.

READ: Succeed in your career, sit down, buy a BTI. Is this Singaporean dream obsolete? One comment

During the past year, however, these rates have risen and now they are close to 3 per cent. It obviously has consequences for consumers who have existing loans or intend to take out new loans.

Consumers who have money do not need to borrow money. But those who are liquidity-limited, or do not have enough money in their hands, are more likely to borrow from banks for large purchases. For them, it is difficult to serve existing debt when interest rates go up.

Image of Singapore Currency. (Photo: AFP / Roslan Rahman)

Think of a family with a total home salary of about SEK 3,000 a month, make a S $ 1,000 mortgage loan, another S $ 1,000 for the children‘s education, transport and other necessities and another S $ 1,000 for discretionary expenses like eating out, clothes and traveling.

They are quite lost at the end of the month and live mainly from paycheck to paycheck.

READ: A mediocre year ahead when dark clouds gather over global economy, a comment

When interest rates rise from 1.5 to 3 percent, consumer debt has been burdened largely. Consumers, especially those in the low-income group, will find it difficult to make their mortgage loans.

In their example, their mortgage payment is likely to increase from S $ 1000 to as high as S $ 1,500. First, they can default on their mortgage. With such interest rate hikes, the reality is that some people will find it hard to end.

The second option is to reduce other forms of consumption. The easiest objects to cut down on are durable and discretionary objects such as electronics, clothing and restaurant food. Essentially, these consumers on the edge have to tighten their belts.

The third option is to borrow on their credit cards and take debt to support the current consumption to the cost of future consumption.

Consumers who can afford the higher loan payments will still be concerned because many may have thought interest rates will not exceed three percentage points. If it were to rise to 4 percent, it could also put this group on the edge.

They have to start thinking about what to do in terms of their spending and behavior.

Interest-bearing movements should not be a surprise to residential movers

Unfortunately, interest rate fluctuations are not new. Therefore, the Housing and Development Agency (HDB) in Singapore offers a fixed interest rate for all home buyers. However, these mortgage loans follow some stringent restrictions and are priced higher compared to bank loans.

A man looking at a model of new apartments at HDB Hub. (Stock Photo: TODAY / Ooi Boon Keong)

READ: Think about the varied effect of HDB systems on different groups of home drivers, a comment

So some home buyers choose to take out a bank loan for their homes. At the same time, all private customers need to buy a bank loan.

Because banks can only give a maximum loan of 75 percent of the house value, since tighter loan limitations were announced last year, homeowners will need more money for down payment. [19659002] This will stretch their finances and force them to count on their savings, savings that would have been beneficial when interest rates rise.

It is also often the case that many homebuyers buy larger homes while waiting for future housing needs. This increases their current debt service burden as interest rates rise.

Instead, they should have bought a smaller house that requires a smaller mortgage loan every month, which gives them more buffer for future price changes.

Wider consequences

Rising prices will also have broader consequences in the economy. Consumers and companies are less likely to take out new loans at higher interest rates and this will damage economic growth.

The banks must therefore consider how the transmission of SIBOR will affect the banks’ lending behavior among consumers and companies and affect their future business plans.

Commercial banks should consider how a higher SIBOR would affect their current service portfolio. Firstly, they will have fewer purchases of houses, as the higher interest rate makes purchasing locations more expensive.

Secondly, many may be common on their mortgages so that the banks will have a higher credit risk on their portfolio. We are already seeing early signs of this in Singapore with mortgage cuts due to rising interest rates and the latest round of real estate screens.

Furthermore, the consequences will also extend to consumers who scan away from credit cards and auto loans. The companies will also be less likely to take out commercial loans because of high interest rates.

FILE PHOTO: A Standard Chartered Bank branch in Singapore on October 11, 2016. REUTERS / Edgar Su / File Photo

From a regulatory point of view, Singapore monetary policy is overseen by Singapore’s monetary authority in the form of a nominal currency policy to keep prices stable. This combined with the act that Singapore has a relatively open capital account means that MAS cannot influence interest rates simultaneously without risking capital flows.

What these collectively mean is that this interest rate increase will inevitably have consequences for the most vulnerable consumer – those who do not understand the financial markets and how the bank works.

In fact, there are few effective solutions in addition to greater financial skill, including understanding of what can affect the loan payment for one in order to make better decisions.

Sumit Agarwal is Low Tuck Kwong Distinguished Professor of Economics, Economics and Real Estate at NUS Business School. The expressions expressed are those that the author has and do not represent NUS views and opinions.

Share
Published by
Faela