Many Singaporeans may be happy about the rising interest rates. The higher interest rates on Singapore dollar fixed deposit or Treasury bills may be helpful to a retiree living on passive income.

However, higher interest rates can be a major problem for real estate investors. Developers are faced with higher financing costs that can hurt their profitability. Those who have high gearing may also face cash flow problems.

Landlords are facing a double blow: higher financing costs that reduce net income and falling property values due to higher discount rates used to value projected cash flows.

Higher home loan rates also affect homebuyers who borrow money to purchase a dream house.

As of value date, Sep 29, the three-month average Singapore overnight rate (Sora), which is based on a compounded annual rate of 0.2 percent in early 2022 has increased to 3.7 percent. The annual interest rate of a home mortgage priced at 1 percent plus the three-month Sora rose from 1.2 percent in early 2022, to 4.7 percent today.

Interest rates could remain high for a long time, which would have a significant impact on the demand for homes in this country.

The progressive payment plan is used by many buyers to purchase unfinished new homes. They do this because they don’t have to incur debt for two or three years, until the house is finished. Developers sold 3,233 unfinished homes in the first half of this year. This accounted for 34% of the total number of private homes in Singapore.

The progressive payment plan involves an initial payment followed by subsequent payments based on construction milestones. Payments are completed at the end of construction or upon completion.

Home loan rates can be lower in the next two to three year for buyers of unfinished homes. If a buyer assumes that the annual interest rate on a home loan will be higher in the future, for example, 4,25 percent, rather than 3 percent, it can have a significant impact on what is considered affordable.

Monthly instalments on a S$1,000,000 loan with a 25-year term of S$4,742 will increase by 14% to S$5,417, based on interest rates of 3% and 4.25 %.

Higher home loan rates make it less financially viable for buyers to use leverage in order to finance a home purchase.

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Consider a buyer who purchases a home worth S$1.5m with S$500,000 equity and a S$1m loan over 25 years. The total mortgage payments over 25 years are S$1.42 and S$1.63 millions, respectively, at annual interest rates of 3% and 4.25 percent.

If the annual price increase is 4%, then in 25 years your home will be worth S$4,000,000. The profit after accounting for the financing costs is S$2,08 million or S$1.87million, depending on whether you use annual interest rates of 3% or 4.25 percent. This is 4.2 or 3.7 times equity.

Homebuyers who are faced with a higher rate of home loans may be forced to reduce their budget.

A buyer who has to pay a monthly installment of S$4,742 may be able to take out a S$1,000,000 loan over 25 years at a 3% annual interest rate.

If the annual rate of interest is 4.25 percent, the loan size will need to be reduced to S$875,000 to keep the monthly payment at S$4,742.

Higher interest rates can have a major impact on the calculations of a residential property investor who relies upon rental income to pay mortgages.

If the rental market is softening or an apartment has been vacant for a while, a landlord could have problems servicing their loan.

Some investors may not sign on the dotted lines because they are concerned about the higher costs of home loans.

Potential buyers with large cash reserves will also be influenced by higher interest rates. Bonds and fixed deposit instruments offer better returns with higher interest rates.

Some people with a lot of cash may choose to invest in these instruments rather than buy a house. Singapore’s six-month Treasury bills offered a yield cut of 4,07 percent in the auction which closed last week.

Higher debt costs can also affect those who have a lot of cash.

Many people are also influenced by the market sentiment. If the new home market is dampened by higher interest rates, cash-rich buyers will be less likely to buy.

Singapore is a great place to live. There are many reasons to buy a home in Singapore.

Even so, the interest rate is important to housing demand. This is driven largely by local buyers. Higher home loan costs can reduce the purchasing power of people who are borrowing to purchase a home as a place to live. When interest rates increase, people who are buying for investment lose their investment appeal.

According to the Urban Redevelopment Authority’s flash estimates, the private home price index increased by 0.5 percent in Q3, following a decline of 0.2 percent in Q2.

The average quarterly growth of around 0.2 percent over the last two quarters is lower than the annual average of 2.1 percent.

The private residential market in Singapore will be affected by expectations that interest rates will remain high for a longer period of time.