Why Are Interest Rates So Low And What Should Singaporeans Do About It?
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By this time, most of us living in Singapore would know that interest rates have fallen significantly over the past year.
While interest rates may appear like a topic in a macroeconomic textbook, it does significantly impact our monthly expenses. For example, if we have taken a variable rate housing loan from a bank, we would know that the interest payable depends on prevailing interest rates 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 affect the returns we earn on our savings and investments. When interest rates are hovering at a low level, our returns are likely to be lower.
For example, the interest earned on our savings accounts and fixed deposits in Singapore has headed south over the past 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 annum (p.a.). If we save our money via these instruments, the returns generated would be lower than before.
Why Have Interest Rates Declined By So Much Over The Past Year?
To deal with the economic fall-out caused 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. Federal Reserve System (the Fed) has an interest rate target of between 0% and 0.25%. This is the interest rates that the Fed pays to banks on their reserves. When interest rates are low, banks have less reasons to hold their reserves beyond the minimum requirements, which encourages the banks to lend more. With more capital made available for borrowing, interest rates naturally fall.
In addition to lower interest rates, many governments around the world have injected additional liquidity into their economies. For example, Singapore tapped into its reserves in 2020 to introduce several schemes such as the Job Support Scheme (JSS), Self-Employed Relief Scheme (SIRS) and the COVID-19 Support Grant, all of which were designed to provide financial support to Singaporeans and businesses.
As a result of these government initiatives to stimulate the economy, interest rates have fallen across the world. As a small and open economy, Singapore has no choice but to accept the lower interest rates that the rest of the world is offering.
What Should We Do When Interest Rates Are Low?
When interest rates are at a low level like what we are experiencing, we may wish to consider how 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 consider taking a bank loan over an HDB loan, given that bank loans are offering much lower interest rates.
For example, DBS is currently offering a home loan package based on the Fixed Deposit Home Rate (which is the prevailing 6 months Singapore Dollar fixed deposit interest rate) + 0.80% p.a. Currently, the prevailing FHR6 interest rate is 0.200% p.a. In addition, this package comes with an interest rate capped at a maximum of 2.30% for the first five years. In comparison, interest rates for HDB loans are much higher at 2.6% p.a.
For those who have taken a housing loan from a bank, it might make sense for us to refinance or reprice our existing home loan, whether it’s to refinance an existing private property loan, or to refinance an HDB loan.
For example, if we have an existing home loan of S$500,000 with an interest rate of 2.6% p.a. over the next 20 years, our instalment works out to S$2,674 each month. If we refinance our loan to enjoy a lower interest rate of 1.0% p.a., our repayments fall to S$2,300 a month.
This translates to savings of S$7,874 in interest in the first year and S$89,872 in interest for a 20-year loan. This assumes no additional fees or rebates and that interest remains at a similar rate for the duration of the loan. However, even if the rates increase slightly in the future, the potential savings we enjoy would be substantial.
Review Our Investment Portfolio
Beyond just the existing loans that we have, it’s also important to consider how we wish to deploy the money in our savings accounts and our investment portfolios.
With low interest rates, interest-bearing instruments such as savings accounts and government bonds (e.g. Singapore Savings Bonds) are no longer as attractive as they once were.
There are no two ways about it. During a period when governments around the world are happy to pump in additional money into the financial system to ensure that the economy continues functioning, we can’t expect to earn high interest on our excess savings.
To ensure we continue to get good returns, we should consider shifting some of our positive cash flow (after setting aside adequate emergency cash and insurance) into suitable investments that can yield higher returns. For those who are familiar with investing, we may 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 are 21 and above can open an online brokerage account with DBS Vickers. Younger investors between the ages of 18 and 20 who wish to kickstart their investment journey early, can also open a DBS Vickers Young Investor Account.
If we do not have the time or investment knowledge to invest in individual stocks and ETFs on our own, there are other investment opportunities that we can consider. One such product is the robo-advisory platform digiPortfolio offered by DBS. This is a hassle-free, ready-made and low-cost investment portfolio managed on our behalf by the DBS investment team. It offers the perfect match of human expertise and robo-technology, enabling us to gain easy access to a well-diversified portfolio from as little as S$1,000 with no lock-in period. This makes it suitable for first-time investors who prefer credible professionals to manage their investment portfolio on their behalf.
For those who prefer to choose their own funds, consider investing in unit trusts. Unit trusts are mutual funds that invest money that is pooled from various investors into a fund that offers 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 such as equities, fixed income and commodities across different geographic regions and industries.
DBS offers a wide range of unit trusts that we can invest in from as little as 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 based on the investment criteria we have.
If we are intending to invest for our retirement, we can also consider investing in funds that are SRS-approved. This way, we can top-up our SRS account, reduce our taxable income and use the funds in our SRS account to invest in selected SRS-approved funds to grow our retirement nest egg.
Continue To Monitor Our Personal Financial Health By Utilising SGFinDex Via DBS NAV Planner
Just as we take care of our physical health, it is prudent to constantly monitor our financial health and review when necessary to achieve financial wellness. To help us, we can use SGFinDex, a public digital infrastructure that allows individuals to access their financial information held across CPF, HDB, IRAS and 7 participating banks in Singapore.
Through SGFinDex, we can access information such as our deposits, credit card balances, loans and investments from financial institutions we have a banking relationship with. Likewise, we can also retrieve financial information from CPF, HDB and IRAS. However, to retrieve the information, we need to access it through a trusted financial planning platform like DBS NAV Planner.
Given the current low interest rate environment that we are in, some of us may be tempted to move as much of our cash savings into investments that can earn us a higher expected return. By linking our DBS NAV Planner with other bank accounts that we have, we get a complete overview of our financial health. These include the savings we have, our average monthly expenses and our emergency savings.
DBS NAV Planner also gives us a picture of our liabilities across the various banks. Any investments that we hold with the various banks can also be consolidated and viewed on DBS NAV Planner. It also provides us with information to identify 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 cover our monthly loan obligations.
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