Commentary: Why that loan to buy that new house and car is cheaper now

Home Business Commentary: Why that loan to buy that new house and car is cheaper now

SINGAPORE: The next interest rate increase in the US is likely years away, according to the Federal Reserve (Fed).

At their recent policy meeting, the Fed signalled that interest rates will likely stay close to zero for at least the next three years, through 2023.



The policy event at the Fed holds important implications for Singaporeans.

READ: Commentary: Americas mountain of debt is a ticking time bomb

READ: Commentary: The US dollar's position is safe – but only for now

For one, the Singapore Interbank Overnight Offered Rate (SIBOR) – the reference rate for many lending and savings products in Singapore – is highly correlated with the Fed funds rate.



The 3-month SIBOR hovered below 0.5 per cent for close to six years when the Fed kept interest rates at rock-bottom levels between 2009 and 2015, after the global financial crisis in 2008.

With the Fed expected to do the same for the next few years, SIBOR will likely stay lower for longer as well. As it stands, the 3-month SIBOR has declined to less than 0.5 per cent from 1.5 per cent just a year ago. This will doubtlessly impact most Singaporean households.


As many would have observed, a key consequence of the Feds move to zero earlier this year is the sharp decline in interest rates paid on yield-accretive deposit accounts and fixed deposits in Singapore. Indeed, it is getting harder to find deposit products that pay very attractive interest rates.

FILE PHOTO: U.S. Federal Reserve Chairman Jerome Powell speaks in Washington

Even in good times, leaving too much cash idle in deposit accounts is unwise. Excess cash is best invested in the markets to earn better returns. With interest rates close to zero, this is even more pertinent today, especially given the fact that the return on cash is dismal.

Ideally, Singaporeans should hold around six to 12 months of their monthly expenditure as emergency cash. Beyond that, they should start investing their money to beat domestic inflation and preserve or increase the real value of their funds.

Recent market turbulence, however, may turn some people off from investing. Yet, waiting for blue skies might mean losing out on attractive investment opportunities that might emerge from such volatility.

A dollar-cost-averaging strategy might be a useful way to take advantage of market volatility while still managing risk. You are essentially investing gradually over time instead of trying to time the markets.

READ: Commentary: Heres why stock markets are defying the economic reality of COVID-19

Monthly investment plans are one practical way to express this idea. Instead of investing a lump sum at a particular point in time, you invest fixed amounts each month over a fixed period of time.

It is a wallet friendly approach and allows you to engage opportunities in financial markets in a steady and gradual fashion.


Those with higher risk appetites, may wish to join the frenzied hunt for yield amid the low interest rate environment. Low interest rates may also prompt many to reach for riskier assets with higher returns.

File photo of Singapore dollars. (File photo: AFP/Roslan Rahman)

Amid the potential flurry of risk-taking behaviour, Singaporeans should remain prudent and guard against investing in products with flashy returns without fully assessing the risks.

They should adopt a long-term view on their investments and focus on quality assets that can offer stable returns despite the difficult operating environment.

They should also stay diversified and not concentrate their bets on a single security or asset class. Diversification is important to ride out the volatile environment ahead.

READ: Commentary: Why gold is still a safe haven in times of crisis

Importantly, Singaporeans should be realistic about their expectations for investment returns.

In an environment where the risk-free 10-year US Treasury note yields a paltry 70 basis points, expecting financial assets to deliver more than 5 per cent yields at very low risk is clearly unreasonable and unrealistic.


On the liabilities side of the balance sheet, with interest rates expected to stay depressed, it might be an opportune time for Singaporean households to review their debt obligations.

If they are still servicing a mortgage, they should check if they are eligible to reprice or refinance their loans at more attractive interest rates to reduce interest payments on debt.

File photo of private homes in Singapore. (Photo: Jeremy Long)

In addition, low interest rates typically support the property market as it becomes cheaper to access funding. In the US, home sales sharply rose above pre-COVID-19 levels largely due to more competitive mortgage rates.

Unsurprisingly, Singapore has exhibited the same trend, with home purchases rising sharply as the cost of borrowing declined. According to the Urban Redevelopment Authority, private home sales in Singapore hit an 11-month high in August.

READ: Commentary: Investing in markets? Why future gains lie in tech stocks

Low interest rates might tempt Singaporeans to take on additional loans to purchase an investment property.

But just because they can does not Read More – Source


channel news asia