Fed expected to delay rate cuts; local mortgage rates may ease, but only slightly

With the US Federal Reserve potentially cutting interest rates this year, local mortgage rates have begun to ease. Fixed mortgage rates at some banks are currently hovering below 3%, markedly lower than the peak of 3.75% recorded late last year.

However, analysts caution that US inflation figures have exceeded expectations for three consecutive months. With persistent inflationary pressures potentially prompting the Fed to delay rate cuts and the broader interest rate trajectory remaining uncertain, local mortgage rates are unlikely to drop sharply in the near term.

Currently, some banks are rolling out promotional fixed mortgage rates ranging between 2.90% and 3%, down from the peaks of up to 3.75% seen at the end of last year.

In fact, several local banks offered similar promotional mortgage packages in the third quarter of last year. However, as industry competition cooled toward the end of the year, these promotions were paused, only to be reintroduced earlier this year.

Regarding the outlook for mortgage rates, market expectations for Fed rate cuts have shifted. While three rate cuts were initially anticipated this year, forecasts have turned more conservative, pointing to perhaps one or two cuts at most. Consequently, any reduction in local mortgage rates this year is expected to be modest. By the end of this year, the three-month Singapore Overnight Rate Average (3M SORA) benchmark may dip by at most 0.5%.

Data released in the US last Wednesday (10 April) revealed that the March Consumer Price Index (CPI) and core CPI rose by 3.5% and 3.8% year-on-year respectively, both topping market forecasts of 3.4% and 3.7%. With US inflation exceeding expectations for three straight months, markets have largely priced out the likelihood of a Fed rate cut in June.

Most Floating Mortgage Rates Remain Above 4%

The spread between fixed and floating mortgage rates in Singapore remains substantial, with most floating rates sitting above 4%. This has led a growing number of homeowners to favour fixed-rate packages.

For homeowners currently on floating-rate packages who are holding out hope for imminent rate cuts, the advice is to proactively explore refinancing options rather than postponing decisions in anticipation of steep rate drops.

Two-year floating mortgage rates in the market typically track the three-month SORA plus 0.65%. With the three-month SORA currently hovering around 3.65%, floating rates stand at approximately 4.3%.

While mortgage rates have retreated from last year’s highs since the start of the year, significant sharp declines appear improbable moving forward.

Should US inflation prove stickier than expected, aggressive rate cuts from the Fed this year are unlikely. This suggests that local borrowers waiting for substantial rate plunges before refinancing may have to wait longer than anticipated.

Most local banks have held their mortgage rates around the 3% mark for some time. In recent months, banks have shown greater willingness to price rates below 3% for higher loan amounts.

At this juncture, the market broadly expects the Fed to push back its first rate cut from June to September.

Markets currently price in a 44% probability of a rate cut in September, which would lower the federal funds target rate from 5.25%–5.50% to 5%–5.25%.