Why Are Rates of interest So Low And What Should Singaporeans Do About this?
By this time around, the majority of us living in Singapore knows that rates of interest have fallen significantly over the past year.
While rates of interest may appear like a topic inside a macroeconomic textbook, it will significantly impact our monthly expenses. For instance, if we have taken a flexible rate housing loan from the bank, we would know that the eye payable depends on prevailing rates of interest benchmarks such as the Singapore Interbank Offered Rate (SIBOR) or the Singapore Overnight Rate Average (SORA). So when interest rates go down, the interest we pay on our home loans also declines.
Interest rates also modify the returns we earn on our savings and investments. When interest rates are hovering in a low level, our returns could be lower.
For example, the eye earned on our savings accounts and fixed deposits in Singapore has headed south in the last year. Similarly, the average 10-year return of Singapore Savings Bonds (SSB) in the April 2021 issue has dropped to a paltry 1.15% per year (p.a.). When we save our money via these instruments, the returns generated could be lower than before.
Why Have Rates of interest Declined By So Much In the last Year?
To cope with the economic fall-out brought on by COVID-19, governments around the world (including the U.S. government) have reduced their interest rates. In fact, as at 16 March 2021, the U.S. Fed System (the Fed) has an rate of interest target which is between 0% and 0.25%. This is actually the rates of interest that the Fed is effective banks on their reserves. When interest rates are low, banks tight on reasons to hold their reserves beyond the minimum requirements, which inspires the banks to lend more. With more capital provided for borrowing, interest rates naturally fall.
In addition to lower interest rates, many governments all over the world have injected additional liquidity to their economies. For example, Singapore tapped into its reserves in 2021 introducing several schemes such as the Job Support Scheme (JSS), Self-Employed Relief Scheme (SIRS) and also the COVID-19 Support Grant, all of which were designed to supply financial support to Singaporeans and businesses.
As a direct result these government initiatives to stimulate the economy, interest rates have fallen around the globe. As a small and open economy, Singapore has no choice but to accept the low interest rates the world is offering.
What Should We Do When Interest Rates Are Low?
When interest rates are in a minimal level like what we should are experiencing, we might want the way we manage our loans, savings and investments.
For a start, let's consider our loans. If we intend to take a housing loan for an HDB flat, it might make financial sense to think about going for a bank loan over an HDB loan, given that loans from banks are providing reduced interest rates.
For example, DBS is currently offering a mortgage package based on the Fixed Deposit Home Rate (the prevailing Six months Singapore Dollar fixed deposit interest rate) + 0.80% p.a. Currently, the prevailing FHR6 interest rate is 0.200% p.a. Additionally, this package comes with an rate of interest limited to a maximum of 2.30% for that first five years. In contrast, rates of interest for HDB loans tend to be higher at 2.6% p.a.
For those who have taken a housing loan from the bank, it might make sense for all of us to refinance or reprice our existing home loan, whether it's to refinance a current private property loan, in order to refinance an HDB loan.
For example, when we come with an existing mortgage loan of S$500,000 with an interest rate of two.6% p.a. within the next 20 years, our instalment calculates to S$2,674 every month. If we refinance our loan to savor a lesser interest rate of just one.0% p.a., our repayments fall to S$2,300 per month.
This translates to savings of S$7,874 in curiosity about the very first year and S$89,872 in interest for any 20-year loan. This assumes no additional fees or rebates and that interest remains in a similar rate for the duration of the borrowed funds. However, even if the rates increase slightly in the future, the potential savings we enjoy could be substantial.
Review Our Investment Portfolio
Beyond only the existing loans that we have, you'll want to consider how we desire to deploy the money within our savings accounts and our investment portfolios.
With low interest rates, interest-bearing instruments for example savings accounts and government bonds (e.g. Singapore Savings Bonds) aren't as attractive because they were in the past.
There are no two ways about this. Throughout a period when governments around the world are pleased to function in additional money into the financial system to ensure that the economy continues functioning, we can't be prepared to earn high interest on our excess savings.
To ensure we still get good returns, we should consider shifting a lot of our positive income (after setting aside adequate emergency cash and insurance) into suitable investments that may yield higher returns. If you are acquainted with investing, we might consider investing in a diversified portfolio of stocks or exchange-traded funds (ETFs) listed on the Singapore Exchange (SGX) or in overseas exchanges. Investors who're 21 and above can open a web-based brokerage account with DBS Vickers. Younger investors between the ages of 18 and 20 who wish to kickstart their investment journey early, may also open a DBS Vickers Young Investor Account.
If we do not have time or investment knowledge to invest in individual stocks and ETFs on our own, there are other investment opportunities that people can consider. One particular product is the robo-advisory platform digiPortfolio provided by DBS. This is a hassle-free, ready-made and low-cost investment portfolio managed on our behalf by the DBS investment team. It provides an ideal match of human expertise and robo-technology, enabling us to achieve quick access to some well-diversified portfolio from as little as S$1,000 without any lock-in period. This makes it suitable for first-time investors preferring credible professionals to manage their investment portfolio on their behalf.
For those who prefer to choose their own funds, consider purchasing unit trusts. Unit trusts are mutual funds that invest money that is pooled from various investors into a fund that provides access to a portfolio of assets. Depending on their financial objectives, risk profile and time horizon, investors can choose from a wide range of asset classes for example equities, fixed income and commodities across different geographic regions and industries.
DBS provides a wide range of unit trusts that people can invest in from less than S$100/month, or with a minimum lump sum of S$1,000. We can search for suitable funds to invest on the DBS platform in line with the investment criteria we've.
If we are intending to invest for our retirement, we are able to also consider investing in funds that are SRS-approved. By doing this, we can top-up our SRS account, reduce our taxable income and employ the funds within our SRS account to invest in selected SRS-approved funds to develop our retirement amount of money.
Continue To Monitor Your own Financial Health By Utilising SGFinDex Via DBS NAV Planner
Just as we look after our health, it is prudent to constantly monitor our financial health insurance and review when necessary to attain financial wellness. To assist us, we are able to use SGFinDex, a public digital infrastructure that enables visitors to access their financial information held across CPF, HDB, IRAS and 7 participating banks in Singapore.
Through SGFinDex, we can access information for example our deposits, credit card balances, loans and investments from banking institutions there exists a banking relationship with. Likewise, we can also retrieve financial information from CPF, HDB and IRAS. However, to retrieve the data, we need to access it through a trusted financial planning platform like DBS NAV Planner.
Given the current a low interest rate rate environment that we're in, some people may be tempted to move as much of our cash savings into investments that may earn us a greater expected return. By linking our DBS NAV Planner along with other accounts we have, we get a complete summary of our financial health. These include the savings we've, our average monthly expenses and our emergency savings.
DBS NAV Planner also gives us an image in our liabilities across the various banks. Any investments that we hold with the various banks may also be consolidated and viewed on DBS NAV Planner. It also gives us information to recognize and close any insurance gaps.
With this overview of our finances, we can make prudent financial decisions – channelling funds towards potentially higher-yielding investments, while ensuring we don't leave ourselves short to pay for our monthly loan obligations.