US Fed rate cut: What it means for your investments, savings and loans
What this means for borrowers
Lower interest rates could spell relief for borrowers, whether you’re looking to buy a home or need a loan for large expenses.
Home owners who have high mortgage rates can also consider refinancing. “Typically, as interest rates fall, a floating-rate mortgage can provide the most savings potentially as compared to fixed-rate loans,” says Mr Lim.
However, fixed-rate mortgages are currently priced lower than floating-rate mortgages, he notes. “These come with attractive features, yet give added protection over a period of two to three years should interest rates rise unexpectedly.”
Fixed-rate loans keep the same interest rate during the lock-in period, while a floating-rate mortgage changes based on a reference rate. Some fixed-rate packages also let you switch to a different loan package within the same bank during the lock-in period, which is called repricing.
The main reference rate for floating-rate mortgages is the Singapore Overnight Rate Average (Sora).
“Home owners may also refinance into a shorter-term mortgage without substantially increasing monthly payment,” Mr Lim adds. This lets you pay off your loan faster and save more on interest.
When refinancing or taking on a new loan, it’s important to keep the total debt servicing ratio (TDSR) in mind. TDSR is the limit of how much you can borrow.
If you’re living in a Housing Board flat and your loan is from a bank, you’ll also need to consider the mortgage servicing ratio (MSR). The MSR applies in addition to the TDSR. Both TDSR and MSR are Monetary Authority of Singapore (MAS) regulatory requirements.
So how do you calculate? For TDSR, your monthly debt obligations, including home and other loans like credit card, should not exceed 55 per cent of your gross monthly income.
For MSR, your property loan payments, including the loan you’re applying for, should not exceed 30 per cent of your gross monthly income.
“Consulting a financial advisor for a balanced and well-informed approach to both borrowing and saving can help ensure long-term financial stability during this period of economic adjustment,” advises Mr Lim.