Will Interest Rates Go Up Soon For Singapore Property Loans?

Many of us are worried that the current low interest rate environment in Singapore could end by the end of the current year, driving up the cost of mortgages and putting stress on the property market. In this piece we take a look at how IRs in Singapore are determined, and where they are probably going to head for the remainder of the year and beyond.

How are IRs determined?

In a 1999 paper titled “Interbank Interest Rate Determination in Singapore and its Linkages to Deposit and Prime Rates”, staff of the Monetary Authority of Singapore (MAS), the central bank, revealed that “only changes in US rates or market expectations of future movements in the exchange rate have a major effect on the domestic interbank rate.”

But other researchers have found that the SIBOR has previously been definitely correlated to the movement of the bank loan to deposit proportion, even after controlling for the impact of US rates. This indicates that if bank loans grow faster than deposits, SIBOR has a tendency to head upwards.

So to summarize, precisely how IRs in Singapore are determined is a debatable subject and there's no simple formula! But we know there are three heavy factors that may influence it: 1) US interest rates 2) Market expectations of the Singapore Greenback exchange rate (will it appreciate or depreciate?) and 3) Demand and supply for loans and deposits in Singapore.

So where are IRs heading?

HK mortgage rates have already risen by as much as 1% over the last a quarter, driven by tight liquidity in the bank system as the growth of loans have outpaced the expansion of deposits. Will interest rates in Singapore also head upwards due to the demand-supply dynamics in the local banking system, regardless of if US IRs stay low for now?

In a corresponding situation to Hong Kong, loans have been growing quicker than deposits, with loan expansion until April of 21.9% vs deposit expansion of 12.7%. If the space between the expansion of loans and deposits continues, this can increase the bargaining power of local banks and increase the likelihood of a higher SIBOR and also IR spread above SIBOR for mortgages.

But Hong Kong has its own particular dynamics “there has been a growing shift into Renminbi from Hong Kong Buck deposits, that has been absent in Singapore as the MAS has let the Singapore Buck appreciate against the US buck, whereas the HK Dollar is pegged to it. In reality the Singapore Dollar has even appreciated against the Renminbi over the past 2 years! But if the MAS comes to a decision to slow the appreciation of the Singapore Dollar, we could begin to see higher rates.

Also, the Singapore government’s fresh moves to moisten speculation in the property sector could lead to both less transactions and thus mortgage volume, and also a lower mortgage per transaction (as the Loan To Valuation limit has been decreased for investment properties). This indicates that loan expansion might start to weaken, while deposit growth remains healthy in spite of the low rates as folks like to park their money in a “strong” currency.

As for where US interest rates are headed, it is anyone's guess. But Singapore’s Asian neighbours China and India have already been raising rates in an effort to handle rising inflation. If inflation starts becoming an issue in the States, and policymakers have faith in the strength of the economy, then rate walks could come earlier than anticipated.

While we don't expect a massive spike in interest rates shortly, they actually can’t go much lower, and borrowers should be prepared for eventualities where they start moving higher. For house purchasers, this means that you should not say that interest rates will always remain this low, and to plan your financial affairs so that you will continue to be ready to meet your mortgage payments even though interest rates rise.

Hope you enjoyed reading this Singapore property market article!

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