A KEY interest rate that determines how much home owners pay on their mortgages is continuing to rise and is likely to increase further.
Borrowers could be facing hundreds of dollar a month in extra repayments in the wake of the steadily increasing swap offer rate (SOR) as the benchmark rate is called.
It was at 0.53428% yesterday - down a touch from the 23-month high of 0.56185 it hit on Dec 15 but still well above the rare negative level of -0.6987% it dived to in August.
The SOR has also increased more than the other key interest rate linked to mortgages - the Sibor (Singapore Interbank Offered Rate).
That was at 0.3985 yesterday, up 5 basis points since last August.
The weak Singdollar in recent months and rising borrowing costs amid the global credit squeeze are behind the SOR's rise of 1.23 percentage points since that low point.
Whatever the reasons, home owners with SOR-linked loans are facing repayments of about 50 basis points higher once the movement from the negative level is taken into account.
A borrower who took out a $1 million loan over 20 years back in August is now paying about $250 more a month in the first year on the initial repayment of $4,688.72, assuming no other charges to the conditions.
As the SOR has been increasing steadily since August, the monthly repayments would also have risen in tandem. The extra interest paid works out to around $5,000 a year.
In August, when the SOR went into negative territory, banks had to invoke special clauses to floor SOR rates at zero. Otherwise, they would have been in the strange position of having to pay borrowers for taking out a loan.
Only ANZ Bank and the Bank Of China offer SOR-pegged loans now.
The SOR is fixed daily by the Association of Banks in Singapore using a formula that takes into account the current and expected exchange rates of the US dollar against the Singdollar and the local interbank lending rates for the greenback.
OCBC Bank economist Selena Ling expects the SOR to keep rising, hitting 0.55% this year as the economic conditions will probably not change in the foreseeable future.
Mr Rohit Arora, Barclays Capital's emerging markets fixed-income strategist, thinks the SOR could even reach 0.7% by the end of the year if the euro zone crisis worsens.
Currency experts say that the Singdollar is likely to stay weak against the greenback for the first half of the year - just the sort of conditions that will keep the SOR trending up.
The US dollar is heading north because investors around the world are bailing out of almost every other assets and seeking safety in the old standby of the greenback.
UOB economists expect the Singdollar to fall to $1.33 against the greenback this quarter, with more declines in store in light of the global economic woes.
UOB economist Chow Penn Nee said: "We think the unresolved crisis in the euro zone will continue to weigh on the Singdollar and will be the key factor in guiding (its) direction."
"So far, European Central Bank measures, such as providing liquidity for banks to participate in European sovereign debt, are only stop-gap measures, which do not solve the debt problems."
But home owners who have a loan pegged to the SOR should not rush to refinance as they may incur additional administrative costs.
Mr Vinod Nair, chief executive of Smartloans.sg, which offers home loan comparisons, said: "My opinion is that if they are on SOR, they should stick to it because the SOR is still at an acceptable rate."
Mr Nair advised that only when the difference between the SOR (now at 0.53428%) and the Sibor (now at 0.3958%) exceeds 0.5 percentage points should homebuyers look for alternatives.
Source: The Straits Times
Back in August 2010 when SOR was hovering around negative territory, the wife and I were cautioning anyone who bothered to listen that the low interest rates are not sustainable. We also raised concerns about possible rate hikes in the foreseeable future . But some of our friends (esp. those who had taken a second SOR-based home loan for their investment property) had waved off our concerns. How high can the rates possibly go given the low base-level, they said. It'll be silly not to take full advantage of the "cheap money" that the banks are offering, they added.
Now that SOR has risen by a whopping 1.23% in just 4 months, we wonder how much longer the monies offered by our banks will remain... "cheap".
And speaking of banks, we also wonder if any of those who had discontinued their SOR-based packages back in August 2010 (citing reasons like SOR-based loans are unsuitable for property buyers who buy residential property for owner occupation, in view of their inherent volatility and the long-term nature of mortgage loans) will do an about-turn now that SOR is back in the positive and rising...