How interest rates can affect your mortgage repayments

The Global Financial Crisis (GFC) of 2008/2009 has made the younger generation, especially those who just started working, feel that interest rates of below 1 percent is the norm. Lo and behold, rates of below 1 percent is actually an abnormally. The record highest 12-month fixed deposit rates since December 1989 was actually 6.08 percent.

3.56 percent was the highest 3-month SIBOR since 2000

The Singapore Interbank Offered Rate (SIBOR) is generally the benchmark interest rates when it comes to floating mortgage interest rates. Typically, banks will price the mortgage repayments by adding a premium – about 1 – 2 percent – to the SIBOR.

What this means is that when the artificially low interest rate environment evaporates, when global economy goes back to its historical norm, we can expect mortgage interest rates to be at about 4 – 6 percent (3.56 percent+ 1 – 2 percent).

You might potentially be paying >30 percent for monthly mortgage

For simplicity, we are assuming a $300,000 mortgage loan with bank floating mortgage rates of premium of 1 percent + SIBOR.

Current 3-month SIBOR is at about 1.1 percent. Therefore, total mortgage interest rate would be 2.1 percent. This would work out to a monthly payment of $1,124.

If rates were to revert back to the norm in the past (since 2000) of 3.56 percent (at its peak), mortgage interest rates will be 4.56 percent, giving a total monthly mortgage payment of $1,538.

That would effectively mean an extra $414 or 37 percent increase in outflow on a monthly basis.

If we are purchasing a pricier property (e.g. EC or private condominium) worth $800,000, the amount that needs to be paid  would be $4,101 in monthly mortgage payments (assuming historic interest rates return).

Interest rates are not expected to revert back to historical peaks YET

Globalrates have been artificially depressed by central banks since the 2008 crisis, largely due to the fact that major nations have not yet recovered from the Great Recession derived from the GFC.

The European Central Bank and Bank of Japan (central banks of European Union and Japan) have even indulged in negative real interest rates to help alleviate its woes. Furthermore, global commodity prices have slumped so badly that we will not see massive and dangerous inflation taking place in the near future.

All indicators show that current rates are here to stay at least for now, while these major economies lick their wounds and heal properly. Nonetheless, we should always be wary because we would not know exactly when will the central banks increase interest rates again and at what pace.

Do not overestimate the ability to service a loan just because interest rates now looks so attractive. This is NOT the norm, and we should always prepare whenever such a scenario happens.

Article contributed by Dollars and Sense