Covid-19 then and now
It has been over 4 months since the first Covid-19 case occurred in Singapore. At the time of this post, there are close to 7 million cases with more than 400,000 deaths worldwide.
This pandemic is expected to last for sometime. Many businesses are affected. But the world may not feel the actual effect yet even as it tries to reopen itself and resume “normal” operations.
Interestingly, the US stock market has almost a V-shape recovery. The market seemed not to care about Covid-19 after all. Did the stimulus package flood liquidity into the market causing a stock market bull run? Or is it a bear market bull run? Or is it the presidential election year market bull run? Your guess is as good as mine.
But what has all these got to do with you refinancing your mortgage? Well, if your lock-in period with your lending bank is almost up (advise that you plan 4 months in advanced to avoid paying interest you could have saved), you may be thinking if you should get a floating or fixed rate type as you refinance your mortgage.
Rate Cuts and Company Financials
FED had their interest rate cut from 1.75% to 0.25% in March 2020 alone. A bold move for a bold virus like Covid-19. FED interest rate cut has a ripple effect throughout the world.
The 1-month Singapore Interbank Offer Rate, or Sibor in short has dropped from 1.582% in March 2020 to 0.248% in Jun 2020. With such a low interest rate, one begins to think how low can it get? Can it get any lower? The historic low for 3-month sibor is 0.34% which is not far from the current rate of 0.56%.
When something hits rock bottom, the only way is up, right? While I hold this statement to be true, the key question is when. The key lies in how the economic figures will turn out post Covid-19 in second half of 2020 followed by 2021. Most company financials would not be looking great for 2020 but it will be interesting to see how they factor effects of the COVID-19 outbreak in a post balance sheet non-adjusting event. If your business is not doing well, there is only one thing to blame. And you know what that is.
What’s Next for Interest Rate?
Budget and Intervention
Many believe the figures or reports for the coming months will not look good. Year 2020 is pretty much wasted. Post Covid-19 recovery will be a long road as social distancing and other measures are put in place to curb the spread of the virus. This means businesses cannot be operating at its optimal level like before. With restrictions of movement, overall spending goes down.
But we really live in a different world when countries can print their own money and inject liquidity into the market. Well, maybe not for all countries but at least for U.S.. And they can do that without depreciating their dollar because the world just hold too much dollar including countries reserves. While Singapore has 4 packages ($6.4b $48b $5.1b $33b) totalling $92.5b (that’s almost 18% of Singapore GDP) to help the community, U.S. has committed more than USD6 trillion (that’s a quarter of the GDP) to kerb the economic decline from the coronavirus pandemic.
With intervention of this scale providing much liquidity into the market, will it mean the economy will be propped up and we can just tide through the crisis like nothing happened? Fundamentally, businesses are affected. Livelihood are affected. Covid-19 will change how people interact, their purchase behaviour and more. It will take sometime for people to forget (people are forgetful!) about the virus and go back to its usual behaviour Pre-Covid norm.
What has these interventions got to do with interest rates? Typically it is interest rate that drives economy. When you want to inject liquidity into the market, it means there is a credit crunch. It wouldn’t make sense injecting money into the market but stay at a high interest rate, right? That would mean a lot of money but no one wants to borrow. When there is no takers, then the logic of injecting liquidity fails. Therefore for liquidity to work, it is coupled with low interest rates.
Yes, some of the funds are dispersed without interest to help the mass public basic needs. These money are given so that these people can continue to spend (on essentials) and that in turn keeps businesses going. But eventually someone has to foot the bill, even when the printing of money (some nice name such as “Quantitative Easing”) is “free”.
Market Scenarios & Interest Rates
So money is injected into the market with low interest rate encouraging spending and borrowing so as to boost economy. At the same time, we are seeing stock markets bull run (at least for now as I am writing). But with so much uncertainties for the coming months and next year, the stock price seems to be overvalued now. But hey, we do live in a different time, sometimes fundamentals and logic can’t work well in a massively-intervened situation. But you know what logic tells us.
There are 2 scenarios that can happen from here which will affect interest rate and probably your decision on what rate type for your refinance package.
Scenario 1: Pandemic subsides and economy recovers quickly (Don’t forget U.S. has a new problem with riots after George Floyd’s case). Overheated economy may drives rate hike by FED because of inflation. But my take is businesses are fundamentally not sound. Interest will remain low until there is a clear indication of inflation or economic overheating.
Scenario 2: Economy slips into recession. This would be a bad thing. But this would mean the more likely for interest rate to remain low.
Given the 2 different scenarios, it is likely that interest rate will remain low over the next couple of years, as the world try to get on its feet post Covid-19.
So What is the Best Refinance Rate? Fixed or Float?
In general, we were told if we expect interest rate to go up, we should take up a fixed interest rate refinance package. If we foresee interest rate to drop, we should opt for a floating rate to enjoy the dropping interest savings.
I see a scenario with interest rate lingering low, and expected to remain low. And given fixed rate is usually higher than floating rate, it will be a good choice to choose the floating rate type interest. It will also be ideal with a shorter lock-in period to take advantage of refinancing to a fixed rate when interest rate is expected to rise.
Unless there are signs to tell us otherwise or an unexpected strong economic rebound (which I think would take a miracle or a vaccine is developed quickly), I think interest rate will remain low. Therefore I think the best refinance rate type would be the float type for now and the coming months.
There is no crystal ball to see the future for sure. But when the refinancing ball is in our court and it’s time to make a decision, we just got to make one.
p.s. Every crisis is an opportunity. Make a decision to refinance 🙂
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