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Comment: Consumers feel the clamp on rising interest rates



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

This must be music for many Ears, interest rate hikes over the past year have had implications for investors worldwide, including Singapore.

Unlike other countries where the lending rate is usually dictated by the central bank, the interest rate in Singapore is set by Singapore Interbank Offer Rate or SIBOR.

Interest rate differentials in the US will affect SIBOR in Singapore, which in turn will affect local mortgage rates.

LOW INTEREST RATE FOR GENERAL ONE DECADE ]

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

The low prices have meant that many have been able to get a mortgage for close to 1.5 percent, finance a car, and maybe even get a small business loan for the most. Low prices at the same time.

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But over the past year, these prices have gone up and now they are close to 3 percent. This obviously has consequences for consumers who have existing loans or are thinking of taking out new loans.

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

  Singapore Dollar Currency on a money exchange

File image of the Singapore currency. (Photo: AFP / Roslan Rahman)

Consider a family with a combined home tax of about $ 3,000 a month, make a $ 1,000 mortgage payment, another $ 1,000 for child education, transportation, and other necessities, and another S $ 1000 for discretionary expenses such as eating out, clothes and traveling.

They are mostly drained at the end of the month and live mainly from paycheck to paycheck.

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When interest rates rise from 1.5 to 3 percent, consumer debt burden has substantially doubled. Consumers, especially those in lower income groups, will find it challenging to make their home loan.

In our example, it is likely that their mortgage will go up from $ 1000 to as high as $ 1,500. [19659002] TRE OPTIONS

At this rate, they have three options. First, they can default on the home loan. With such interest rate increases, the reality is that some people will find it difficult to make ends meet.

The other option is to cut down on other forms of consumption. The easiest element to cut down would be durable and discretionary items such as electronics, clothing and restaurant food. Essentially, these consumers on the edge must tighten their belts.

The third option is to borrow on the credit card and take on debt to support current consumption at the expense of future consumption.

Consumers who can afford the higher loan Payments will nevertheless be busy, as many may have thought that the interest rate 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 next in terms of their spending and savings.

INTEREST LIMITS SHOULD NOT BE EXCELLENT FOR HOME BIDERS

Unfortunately, interest rate fluctuations are not new. Therefore, in Singapore, the Housing and Development Board (HDB) offers a fixed rate package to all public home buyers. However, these mortgage loans come with some strict restrictions and are priced higher compared to bank loans.

  hdb new apartments

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

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So some HDB home buyers choose to withdraw a bank loan for their public housing. Meanwhile, all private home buyers must get a bank loan.

Since banks can only give a maximum loan of 75 percent of house value since tighter restrictions on loan values ​​were announced last year, homeowners will need more money for repayment. [19659002] This will stretch their finances and force them to draw on their savings, savings that would have been useful when interest rates rise.

It is also often the case that many residential builders buy larger homes in anticipation of future housing needs. This increases its current debt burden when prices increase.

Instead, they should buy a smaller house that requires a small mortgage payment each month, which gives them more buffer for future interest rate changes.

Wider consequences

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

Banks, therefore, need to think about how this transfer of SIBOR will affect consumer and business lending practices and affect their future business plans.

Commercial banks should consider how a higher SIBOR would affect their current service portfolio. First, they will have fewer purchases of housing, as higher interest rates make buying homes more expensive.

Second, many may have a standard on the home loan so that the banks will have a higher credit risk on the portfolio. We are already seeing early signs of this in Singapore with the decline in mortgages due to rising interest rates and the latest round of real estate frameworks.

Furthermore, the effect will also extend to consumers who differ from credit cards and auto loans. Businesses will also be less likely to take out commercial loans because of high interest rates.

  FILE PHOTO: A Standard Chartered Bank Branch in Singapore

FILE PHOTO: A Standard Chartered Banking Department in Singapore October 11, 2016. REUTERS / Edgar Su / File Photo

From a regulatory point of view, monetary policy in Singapore has been monitored by The Singapore Monetary Authority (MAS) is a nominal currency policy to keep prices stable. This, combined with the fact that Singapore has a relatively open capital account, means that MAS cannot influence interest rates simultaneously, without risking capital flows.

What this collectively means is that this interest rate rise will unintentionally have implications for the most vulnerable consumers – those who do not understand the financial markets and how the banking business works.

There are really few effective solutions apart from greater financial skills, including understanding what can affect one's loan amount for one to make better decisions.

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


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