How Interest Rate Cuts Impact Home Loans: Is Now a Good Time to Refinance?

On 23 August, the US Federal Reserve Chairman stated that "the time has come" to begin cutting interest rates. This has raised expectations of a rate cut at the next Federal Open Market Committee (FOMC) meeting in mid-September.

However, the Head of Group Personal Financial Services at UOB noted that the magnitude of the initial rate cut and its subsequent trajectory remain uncertain.

Historically, Singapore's interest rates have moved in tandem with US rates. When US interest rates rise or fall, Singapore's interest rates and mortgage rates follow suit.

In anticipation of US rate cuts, interest rates in Singapore have been sliding in recent months. Mortgage rates are likely to continue softening as the Fed eases monetary policy and lowers rates.

Mortgage rates, particularly for fixed-rate home loans, have already come down, with two-year fixed-rate packages now nearing 3%.

The benchmark three-month compounded Singapore Overnight Rate Average (SORA), used by local banks for floating home loan packages, has declined. According to rates published by the Monetary Authority of Singapore (MAS), the three-month compounded SORA stood at 3.701% in early January, easing to 3.572% as of 28 August.

By the end of this year, the three-month SORA is projected to reach 3.4%, with the Fed expected to deliver a cumulative 50-basis-point (bps) rate cut by end-2024. By end-2025, the three-month SORA could drop further to 2.7%.

Capitalising on the Lower Interest Rate Trend

Homeowners should take advantage of the lower rates to refinance their existing mortgages. However, borrowers whose mortgages are pegged to the Singapore Interbank Offered Rate (SIBOR)—which will be phased out after 31 December—are expected to experience some "price shock", as SORA tends to be higher than SIBOR.

If homeowners see their financing costs increase significantly due to the transition to the SORA benchmark, they should review their options and shop around for more competitive mortgage deals. Singapore homeowners—both prospective buyers and existing owners—stand to benefit from lower financing rates.

For example, if a homebuyer secures a $1 million home loan over a 30-year tenure at an interest rate of 3.6%, the monthly mortgage instalment is estimated at $4,546. Should the rate fall to 3.1% by the end of 2024, the monthly instalment would decrease to $4,270, translating to a monthly saving of $276.

Borrowers with outstanding mortgages should maintain flexibility and avoid locking themselves into long-term commitments, especially when rates are poised to decline. A variable-rate package with a one-year lock-in period could be worth considering.

Lower mortgage rates also improve borrowing capacity. Most banks apply a stress-test rate of SORA + 1%. A household with a combined monthly income of $16,000 and a 30-year loan tenure could borrow up to $1.7 million. If the stress-test rate drops by 50 bps, the maximum loan quantum would increase by $100,000 to $1.8 million.

Repricing or Refinancing?

Some homeowners may consider repricing—switching to a new loan package with the same bank—though a repricing fee may apply. Others may opt to refinance by moving to another lender offering a more competitive home loan package.

Refinancing allows homeowners to optimise mortgage terms, secure lower interest rates, and enjoy reduced monthly instalments. It also provides the flexibility to switch loan types and features to better match evolving market offerings.

However, refinancing to another bank incurs additional costs, such as legal fees, valuation fees, prepayment penalties, or the clawback of legal subsidies. Homeowners should therefore calculate whether the total switching costs outweigh the potential savings from refinancing.

Furthermore, some home loans form part of wider banking programmes that offer bonus interest on savings and credit card spend. Switching banks could result in forfeiting higher interest yields on savings accounts.

Fixed-Rate Loans "More Attractively Priced"

Over the past year, banks have generally priced fixed-rate packages more attractively than SORA-pegged floating loans, a trend expected to persist into 2025.

OCBC offers one-, two-, and three-year fixed-rate mortgage packages alongside three-month compounded SORA floating packages. The two-year fixed-rate package remains the most popular, priced approximately 0.35% lower than it was a year ago.

Some banks offer free conversions between fixed and floating rates after one year, or provide a one-year fixed rate with a two-year lock-in period, allowing borrowers to switch to a variable-rate package in the second year.

Given the competitive lending landscape, banks may also vie for business by offering fully subsidised valuation and legal fees for borrowers looking to refinance.

Interest rates in Singapore are not expected to decline drastically. Barring an economic recession, any reduction in rates is likely to proceed at a very gradual pace.

As Singapore maintains an appreciation stance in its monetary policy to cushion against underlying inflationary pressures, domestic rate cuts are not expected to move entirely in lockstep with the US.