What interest rate means for average Singaporeans

In recent months, it has been tough for one to avoid reading articles that highlight the rising Singapore Interbank Borrowing Offer Rate (SIBOR). In general, the trend is supported by an expectation the days of low interest rate haven is about to diminish.

So how does interest rate really affect our daily life? A useful starting point would be to see how interest rate affects our personal finances.

Home Purchase

Singapore is often viewed as a homeowner nation given the high homeownership level of the population. The idea of higher cost of living in Singapore tends to create greater anxiety among younger generation on the affordability of buying a home.

For those who intend to upgrade their nest, understanding the interest rate environment in Singapore can allow you to make a more informed choice.

SIBOR in general can be viewed as the rate at which financial institutions (banks) lend to one another. The rate comes in multiple tenor terms of 1,3,6, and 12 months.

Banks commonly offer SIBOR-pegged loan. For example, housing loan rate can be in the form of SIBOR + 1.5%. Therefore, the amount of loan repayment moves in tandem with SIBOR's movement.

For conservative borrowers, fixed mortgage rate might be a more palatable choice. Yet, banks may provide fixed rate only for the initial years and beyond that would be converted back to the usual floating rate.

A savvy you might wish to look beyond the low mortgage rate during the first year and better plan for the plausible higher home financing cost during the floating rate years. Also, look out for any penalties or provision for early repayment that may help you to loosen your mortgage burden before any future upward movement of loan rate.

Savers and Borrowers

The past few years of low interest rate environment has been a haven for borrowers. The low interest rate means that basic saving deposit rate for savers typically hovers around 0.05% or slightly more depending on the amount of saving.

This is much lower than the inflation environment in Singapore. This means that for savers, the low interest rate does not compensate the loss in money value eroded by the higher inflation rate. It might be time to review where you park your disposable income.

Borrowers often thrive in the low interest rate environment given that fundamental theory and in practice suggest a lower cost of borrowing. Depending on the package of your personal loan or education loan, the cost of the borrowing might be lucrative for one to finance their expected expenses by locking in loan at the low interest rate.

If you are financing your education loan, it is vital to understand the composition of the loan rate and better plan the cost of repayment of loan.

Investors

The recent policy by Singapore Exchange (SGX) to allow a smaller share lot purchase from 1000 shares to 100 shares may potentially encourage investors by lowering the barrier to entry for purchase of blue chips stocks.

The upward trend of most equities market, likewise for Singapore indexes, have been supported by the low interest rate and largely sensitive to US Federal Reserve (FED) monetary policy. A low interest rate environment lowers the cost of borrowing for business expansion and adds up to the profit of these companies.

Thus, monetary easing news from US often lifts equities market around the world and influences Singapore equities market through the lower interest rate mechanism.

Bonds, which are debt securities, offered by government and corporations typically show inverse relationship to interest rate movement. A higher interest rate often dampens bond prices given that investors may flock to other higher interest-bearing investment. The lower in prices can be viewed as a market compensation for holding onto bonds.

The ending era of cheap money?

Even with the recent slowdown in creation of new jobs in the US, most analysts would agree a general strengthening of US economy and the likelihood of FED to normalise interest rate in the near future. The expectation of a hike in the interest rate is sufficient to provide ground for an expected upward trend of SIBOR rate and affect those who are intending to purchase their dream home.

Financial planning in the form of assets purchase (home) and investment need not be daunting. Before you dip your cash into the next purchase, it is perhaps time to re-look at your finances today.