Friday, June 17, 2022

Mortgage takes a bigger bite of my income

CNA published an explainer last evening about how the U.S. Fed interest rate hike impacts mortgage rates in Singapore [here].

This brings to mind a letter I received from DBS a few days ago. The bank wrote that in view of the increase in their FHR6 (6 months Singapore Dollar fixed deposit interest rate), they will be raising my mortgage rate from 1.00% to 1.55% p.a. accordingly.

My first reaction was, "Yikes."

I know the Fed had hiked Fed Funds Rate (FFR) by 50 basis points in May, but DBS is raising their FHR6 by 55 basis points???

I can imagine getting more letters from DBS in the remainder of the year, as the Fed had just hiked FFR by 75 basis points in June, and is committed to do the same in their July meeting if required.

This spurred me to reach deep into my email inbox and retrieve the details of the repriced mortgage package which my wife and I signed with DBS in September 2021. Back then, our mortgage lock-up period was expiring, and DBS strategically sent us an email with an attractive repricing offer.

The offer was a fixed rate package tied to FHR6 in stepwise increment for first three years. FHR6 + 0.80% p.a. for first year, FHR6 + 0.85% p.a. for second year, FHR6 + 0.90% p.a. for third year and FHR6 + 1.00% thereafter.

But what got me to sign on the dotted line was a feature that DBS offered:

The bank promised to cap the maximum interest rate at 1.60% p.a. throughout the first three years.

Looking at the inflationary enviroment today and the central banks' aggressive posturing, I am glad I have gotten the deal.

Mortgage servicing is due to take a bigger bite out of Singaporean households' expenditure. A 1.00% increase on a $500,000 mortgage means an extra $417 per month to the bank.

That is $417 which could have been spent on a nice staycation, a new kitchen appliance or an investment course.

Or if you are a glutton like me, that is $417 which could have been spent on restaurant meals.

$417. Each. Month.

My wife and I are dead set to repay the full mortgage at the end of the three-year lock-up period. That will be one heck of a milestone for us.

In the interim, time to 'take revenge' by investing in bank stocks. DBS itself is starting to look attractive. Yummy.

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