While much of Singapore was asleep, the US Federal Reserve (commonly referred to as The Fed) implemented yet another interest rate hike. This marks the sixth increase in 2022, with the latest adjustment bringing the Fed’s interest rate to a range of 3.75% to 4%. This decision, part of a strategy to combat soaring inflation, follows a previous increase in July, which raised rates by 0.75 percentage points from 1.75% to 2.5%.

Although the United States is over 15,000 kilometers away from Singapore, the economic policies and decisions made by US financial institutions have significant ripple effects on Singapore’s economy due to its interconnectedness with global markets. Below, we break down what the Fed’s interest rate hike means for you as a Singaporean:

1. What is the Fed Interest Rate?

The Federal Reserve sets the interest rate at which financial institutions can borrow money. Following the financial crisis of 2007-2009, the Fed lowered borrowing costs to near-historic lows to prevent a deeper economic downturn. Currently, this rate increase is viewed as a necessary action to control inflation, which has surged worldwide due to post-pandemic demand and geopolitical tensions, such as the ongoing war in Ukraine.

In July 2022, the Federal Open Market Committee (FOMC) increased its benchmark rate to 2.25% to 2.5%, with expectations for further hikes to reach 3.4% in the subsequent months. The latest increase in November adds another 0.75 percentage points, reflecting ongoing concerns about rising inflation rates, which are escalating at their fastest pace in 40 years in the US.

2. Implications of Fed Rate Hikes on Singapore

You might wonder why the Fed’s actions are relevant to Singapore. Historically, Singapore’s home loan interest rates were tied to the Singapore Interbank Offer Rate (SIBOR), which depended on US interest rates. However, with the phasing out of SIBOR—specifically the 6-month SIBOR as of March 31, 2022, and the 1-month and 3-month SIBOR set to cease after December 31, 2024—new home loans are now benchmarked by the Singapore Overnight Rate Average (SORA).

SORA reflects the volume-weighted average borrowing rates in Singapore’s unsecured overnight interbank cash market. Changes in the Fed’s interest rate have global implications, influencing SORA directly. For homeowners who secured loans during the pandemic when rates were at historic lows, the rapid increase in SORA has a direct impact on their mortgage payments. For example, the 3M SORA interest rate increased from 0.194% in January 2022 to 2.4945% in November 2022, indicating a significant upward trend.

3. Options for Singaporean Homeowners

If you currently have a SIBOR-linked home loan, banks will gradually convert these to SORA-linked packages over the next few years. Given the trend of rising interest rates, now may not be the best time to remain tied to a SORA-linked loan. Historically, when the Fed increased rates in 2015, there was a marked shift away from SIBOR-linked packages.

During times of rising interest rates, fixed-rate home loan packages often become the more prudent choice. These loans provide stability and shield borrowers from fluctuations in interest rates, which are expected to continue rising.

4. Fixed vs. Floating Rate Home Loans

While fixed-rate packages typically come with higher interest rates than floating-rate packages, many borrowers prefer the certainty they provide. With a fixed rate, you avoid the uncertainties of rising rates. If you are considering refinancing, it may be wise to act sooner rather than later to lock in a fixed rate amidst a rising interest environment.

In conclusion, as interest rates continue to climb, Singaporean homeowners should carefully evaluate their mortgage options, considering both current financial situations and future market conditions.