Monday, May 16, 2022

How Will Our Lives Be Impacted In The Face Of Rising Interest Rates

There has been lots of new stuff happening since my last blog post back in December 2021. A few months back, Singapore started opening up and relaxing measures for COVID-19. It seems life is mostly back to normal now. While we were just starting to enjoy this good news after 2 years of abnormal life during covid, new things start unfolding which is starting to impact our lives and may impact us even further. 

Firstly, the Ukraine-Russian war started. This caused oil prices to skyrocket impacting petrol prices immediately. If you own a car, the impact is felt with petrol prices at more than $3 a litre. Ukraine is one of the largest exporter of many items such as wheat and seed oil like sunflower oil. This impacted daily living also as what we are beginning to experience. Edible oil prices have increased which even cause hawkers to have no choice but to increase their prices for the food they sell. I personally have experienced food prices increasing by 70 cents to $1 for every plate of food. Groceries items in the supermarket have increased as well. Indonesia also recently banned all exports of palm oil which skyrocketed the global palm oil price. Palm oil is used for food manufacturing and it is in close to 50% of the packaged products we find in supermarkets, everything from pizza, doughnuts and chocolate, to deodorant, shampoo, toothpaste and lipstick. We should see prices continue to increase in the months ahead. 

Secondly, because of the risk of high inflation due to higher prices, central banks all around the world are increasing their interest rates to slow down inflation. This is to prevent prices from going too high and making the economy unstable and at risk of a recession. Singapore do not have an interest rate policy so we are a taker of interest rate and will be affected by this by a great extent. Already, we are seeing interest rates for mortgage loans going up from as low as 1% 1 to 2 years ago to 1.3%-1.5% now for floating rate. For fixed rates, it has increased even more to 1.80% for a 5 years fixed rate from DBS. This shows that banks are forecasting that interest rates will continue to increase so they are not keen to price fixed rates loans at low rates anymore. 

Interest rates increase will affect not just home loans but everything in life. The sky high property prices will definitely fall as loans become more expensive and less affordable. Businesses will incur more cost on their loans because of high interest rates so they may pass on the increase cost to consumers. In rising interest rate environment, essentially those who have debt are losers while savers will benefit. We should see higher interest rates for bank accounts soon. You might have noticed that banks are starting to launch higher interest fixed deposit accounts and Singapore Savings Bond is also at an all time high of average 2.53% for a 10 year period. The 1st year interest given for SSB for the May launch is 1.43%, 2nd year will go up to 2.41%, 3rd year at 2.68% and 4th year onwards will be 2.71%. This is the highest SSB rate I've seen in a long time. 

Lastly, with risk free rates like fixed deposit accounts and SSB giving such high interest, investments such as in stocks and Reits become less attractive. You can get 2.5% risk free on SSB while Reits yields about 5% so the difference is only 2.5% but Reits have higher risk so naturally Reits prices start to fall as well. For growth stocks, it also drops as the risk is even higher and with higher interest rates, these businesses which rely on loans to expand their business will face some cost pressures and may slow down their expansion plans which caused their stock prices to drop even more. Nevertheless, stock prices will drop to a certain extend only and its the best time now to pick up some good companies as the stock prices drop. We should see Reits prices coming down and investors will pick them up again when they start to yield more than 6% which better justify the risk to return. 

Those who have bonds in their portfolio (not SSB) will see bond prices coming down as interest rates increase. So, if your portfolio has both bonds and stocks, you will likely see your portfolio drop even further as both bonds and stock prices drop in correlation to rising interest rates. It is still an unknown how much more interest rates will increase so we have to wait and see. 

If you have mortgage loans on 3m SIBOR, the rate as of 9 May has already increased to 1.11% as compared to 0.43% in Jan this year. This is already a 0.7% increase in just 5 months. If your loan is on the new SORA benchmark, interest rate has increased from 0.14% in Jan 22 to 0.89% as of 13 May 22. A 25 years tenure, 500K loan, with 1% rise in interest rates will increase your monthly mortgage payable by $235/month. If its a 1 million loan, it doubles. 

Don't belittle the things that are happening around the world now. All of us will be affected one way of another. We should relook at our financials and adjust accordingly so that we will not end up in deep trouble later. 

Enjoyed my articles? 

or follow me on my Facebook page and get notified about new posts.

No comments:

Post a Comment