Will you give it a yawn when you hear the news that the interest rate hike is coming? You may yet to realise how deeply this will affect you and your money.
For a start, when the US Federal Reserve increases their interest rates, it is not only an American thing. US interest rates matter to Singapore. When the interest rate in the US is raised, so will it be in Singapore.
The interest rate is important because it affects your everyday decisions about your money. It influences the cost of your borrowing, the stability on your savings, and the return on your investments.
Therefore, the interest rate is something you need to watch out for. It is not just about how much interest you can get from your fixed deposits or savings account, but also the impacts on your personal wealth.
Some of these impacts can be obvious. For example, if you know one local bank starts paying you 10% interest today, will you move all your savings to this bank? I bet you will.
At the same time, will you still consider investing in stocks since you can take a nearly risk-free return by just leaving your money in a bank?
On the flip side, you may be comfortable paying 2% for your mortgage loans now, but would you get jittered if you receive a notification from the bank that they are going to raise the mortgage interest to 6% next month?
By the way, if you think this is not possible, it’s because you did not see how much Singapore interest rate was in the past.
In this article, I will talk about 4 things happening now due to interest rate hike. You may not notice the impacts yet, but they will definitely affect you.
- Currency fluctuations affect your net worth
- Higher home loan interest rates affect your cash flow
- Depressed bond prices affect your stable investment returns
- Changing economic conditions affect your asset allocation
#1. Currency fluctuations affect your net worth
A lot of times, people don’t realise that the lifestyles which we enjoy today are built upon strong Singapore dollars. The cost to purchase an iPhone is a one-week salary of an average Singaporean, but that is the monthly salary of a person who is doing the same job in China.
US interest rate hike will have a negative impact on Asian currencies in the short term. The reason is simple: if you can get 1.5% by saving money in USD comparing to 0.5% in SGD, you will want to convert your money from SGD to USD. This will create more demand for USD and less demand to SGD. As a result, SGD will fall again USD in the short term.
As you can see from the chart below, even before the US started to raise their interest rate, Singapore Dollar has already depreciated in the past 5 years gradually.
So what happens when SGD drops? Our purchasing power drops too.
It now takes more Singapore dollars to buy the same foods and essentials which we used daily. The real value of our assets drops too. We have witnessed this happening with our neighbour when Malaysia Ringgit hit an all-time low.
The depreciation of a country’s currency is a double whammy. The value of the big-ticket asset, such as stocks and real estates, will drop significantly and force asset holders to sell. On the other hand, these selling activities will accelerate the further depreciation of the currency.
This kind of currency movement can be fast and furious. For most Singaporeans, nearly all assets are valued in Singapore dollars, that is an important aspect you must watch out for.
#2. Higher home loan interest rates affect your cash flow
The currency movement due to the interest rate hike might be unpredictable in the long run. But the impact to your cash flow is almost certain.
Nearly every Singaporean has at least one house. And the majority of Singaporeans are carrying a huge mortgage loan. The quantum of the loans has been increasing over the years.
According to Tradingeconomics, Singapore households Debt to GDP is already more than 62% now.
When the interest rate is higher, your mortgage rate will also be increased, so is your monthly repayment. The table below shows how much more your mortgage repayment will be when the interest rate starts rising.
If you are just able to fork out $5,000 to service your home loan, an additional $1,000 monthly repayment will become a huge financial burden to your family.
In the past, you may be able to refinance or extend the loan to a longer period. However, many people can no longer do so due to the control of the Total Debt Servicing Ratio (TDSR).
As a result, some homeowners may have to sell their properties. But as I mentioned earlier, when the currency drops, the dollar value of your property also drops. With all the other cooling measures and whatsoever, it is no coincidence that Singapore private home prices fell down for 14 straight quarters.
Clearly, the government has seen that many retirees are struggling to pay off their debts and just had the rules relaxed.
Many Singaporeans bought properties in the past few years on the back of low interest rates. And now the interest rate hike will come to bite all these purchases.
#3. Depressed bond prices affect your stable investment returns
Unknown to many retail investors, bond investment was the secret weapon for many high net worth individuals to preserve and grow their wealth without taking excessive risks.
For a long period of times, smart investors could generate good returns through bonds. In fact, bond markets have a huge bull run for more than 20 years. It is often a hearsay that stocks deliver a higher return due to higher risk. But do you know for 20 years, Singapore government bonds have delivered nearly the same return as Singapore stocks?
The problem is that the good years for bonds are over. Mathematically, when interest rates go up, bond prices must come down. Many bond investment has turned from a haven into a risky asset.
It is not only that bond prices are declining, bonds start to default too. Many bond investors learn this the hard way when Swiber defaulted their bonds.
Even if you are not a direct bond investor, you are not immune. Just ask yourself, who are the biggest bond investors?
They are your insurance companies, your fund managers and even your company’s pension funds and our CPF.
In the past few years, all insurers and fund managers are struggling to find decent income returns to deliver to their policyholders. This will directly affect your endowment plans, retirement plans and your investment portfolios.
#4. Changing economic conditions affect your asset allocation
Rising rates are a sign that the economic and market conditions are shifting. Mainstream media likes to portrait that rising rates means a good economy. That is overly simplified. The economy is changing, but not necessarily good in all aspects.
If you are a small business owner or the finance manager of a company, you know what I am talking about. When interest rates go up, will you face these tough decisions?
- Is it going to cost you more to borrow?
- Will you find it harder to get credit?
- Will it affect your business expansion and new hiring plans?
- Do you still want to proceed with a big capital investment?
By now you should know that it doesn’t matter if you are an investor for property, stocks or bonds, all investment assets are affected when there is an interest rate hike.
There are already three interest rate hikes since 2016 and this is just the beginning.
Whether you are an experienced investor or just starting out, it is time for you to review your investment portfolio to ensure it is still relevant to the current markets. Here are the things you need to look out for:
- Are your investment on track to achieve your financial goals such as retirement?
- Are you taking more risks than what you expected?
- Are you holding excessive bond instruments which are set to fall?
- Are your investments diversified globally?
- Are your investment advisers updating you the new market dynamics?
If you have an investment portfolio and you want an independent and professional review, click here to find out more.
I didn’t see FD interest rates increase
That is a good observation. Rising interest rate means the cost of “borrowing from the bank” increases. But FD interest rate is the other way around, it is the bank “borrowing money from you”.
Since the bank is in the business to borrow money from you and lend it to other people, they will not raise FD rate as far as possible. So you have to wait for a while before you see FD interest rates increase.