Do interest rate hikes have any impact on me?

For many young Singaporeans, their first face-to-face encounters with interest rates look like this:

How to pay for my tertiary education… and the laptop? What do you mean borrow first and immediately repay after I graduate…? I can’t owe money before I start earning money… that’s warped! (Also known as adulting.)

 Who should I go with… HDB or the banks? What’s with the floating rates… that’s a whole lot of extra thinking and paperwork.

 That 0% interest instalment plan is really tempting…

It may be the first time they see so many zeroes in their statements, and the first time they truly grasp the value of money. Indeed, interest rates convey the price of money. You want some, you gotta earn some or loan some; the higher the interest rate, the costlier the loan. Interest rates do not stay constant for the same reason that demand for money and supply of funds are never constant.

Singapore is seeing a rise in interest rates mostly as a result of hikes by the Federal Reserve Board (the Fed) in the United States. What does this mean for you and me?

If you are still living with your parents and have no loans, then you are mostly sheltered (although not from nagging).

If you took a loan for big-ticket items such as housing, then you would be one of the first to sit up and take notice of this trend. Unless you had locked in the interest rates for the next few years with a fixed rate loan, your monthly payments will quickly increase as the Singapore Interbank Offer Rates (SIBOR), Swop Offer Rates (SOR), and Board Rates rise. For an increase in 0.5% on your S$500,000, 25-year mortgage interest, you would be paying more than S$100 extra per month.[1] If forking out thousands more for your loan every year does not sound appetising, you may wish to explore refinancing or paying off more of your debt now.

Likewise, real estate investors may have to depend on other income streams as they find their rental income in a soft rental market insufficient to cover mortgage.

There is some upside to rising interest rates. For persons keen on investing in the Singapore Savings Bonds (SSB), the November 2018 bond has the highest first year interest to date at 1.8%. This is attractive for new investors, especially those with low risk appetite and low budgets; for SSBs, you need only a minimum of $500 to begin investing. The SSB interest rates for each issue are fixed and locked in for the full 10-year term, so you know how much interest you will be getting, unlike conventional bonds. The interest rates step up over time, allowing you to eventually secure an average return per year of between 2% and 3%. This definitely fares better than your typical savings accounts, or even some fixed deposit accounts. In fact, another advantage it has over fixed deposits is that you can redeem anytime before the bond matures without being penalised. The S$2 transaction fee for each application or redemption is minimal if you are investing at least a few thousand dollars.

To illustrate, if you purchase the November 2018 SSB at S$100,000 and keep it until maturity, in ten years, you will earn S$25,000. This is impressive for a super safe investment since your principal investment and interest payments are fully backed by the Singapore Government, the institution with the strongest credit rating. You can calculate your potential SSB interest earnings here.

Whether you are young or old, it is wise to know that changes in interest rates impact us and our (or our parents’) purchasing power, especially if we live on borrowed money.

[1] Based on PropertyGuru’s Interest Rate and Loan Term Sensitivity Calculator https://www.propertyguru.com.sg/mortgage_loan_calculator `