The Federal Reserve in the United States cut interest rates again on 15 March 2020, the second emergency cut this year after dropping 0.5% on 3 March 2020. Even more surprising? The emergency rate cut of 1.0%, to a range of 0% - 0.25%. The official explanation for these drastic measure is the uncertainty over the impact of COVID-19 on the economy, especially as the number of reported infection cases are expected to rise in the US.
This is the fifth consecutive interest rate cut over the past 12 months and the biggest Fed Rate cut since 2008, the start of the Great Recession. We knew earlier this month after the first Fed Rate cut that there would be more adjustments this year but we definitely did not expect this much this soon.
What does the US Fed Rate have to do with SIBOR?
Changes to the US Fed Rate have global repercussions, and Singapore is consistently affected. This graph shows how closely the US Effective Federal Funds Rate has influenced the Singapore Interbank Offered Rate or SIBOR over the past 5 years.
(Sources: The Association of Banks in Singapore, https://www.abs.org.sg/benchmark-rates/rates-sibor; Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, March 5, 2020.)
This level of correlation means that we can expect SIBOR to keep dropping over the rest of 2020. Last year in August, after the first US Fed Rate cut, SIBOR immediately dropped from a high of 2% to 1.88%.
Even before this week's US Fed Rate announcement, SIBOR was already dropping steadily. But the surprise announcement has led to a sharp decrease these past two weeks. Less than two weeks ago, on 5 March 2020, 3M SIBOR was 1.47%. On 13 March 2020, 3M SIBOR dropped to 1.21%! And now, with the drastic Fed Rate cut, you can expect SIBOR to drop even further.
What does the US Fed Rate have to do with your home loan in Singapore?
Many home loan packages in Singapore are linked to SIBOR. These SIBOR-based floating rate packages are volatile and are therefore considered medium- to high-risk. However, they are the most transparent and fairest of all the home loan packages in Singapore.
Currently, SIBOR-based home loan packages give you the lowest rates in Singapore, with some banks offering packages that are less than 1.75%.
However, history has shown that as SIBOR gets lower, the bank spread increases. In 2015, when SIBOR was below 0.8%, a typical home loan package was 3M SIBOR + 0.75%!
In response to the drastic Fed Rate cuts, bank spreads are already being revised upwards. By the time you read this, the low bank spreads we enjoyed at the start of the year may no longer be available.
Should SIBOR remain low, you won’t need to refinance, as you will be enjoying a lower spread than what the market will be able to offer. And should SIBOR eventually increase, the low spread you’re enjoying now will ensure your home loan interest rates will never become too high to handle. By then, you’ll be able to refinance to a better home loan package anyway.
The Mortgage Master difference
At Mortgage Master, our consultants have decades of combined experience in the home loan industry in Singapore. We can advise you on the best home loan in Singapore according to your financial needs and risk appetite. Best of all, our service is free!