7 Methods to Cushion the Impact of Higher Mortgage Instalments
Interest rate hikes have no doubt increased our monthly mortgage instalments in recent quarters and are slated to continue upwards until its forecasted peak of 4.6% in 2023.
Following that and an expected drop in inflation, the Federal Reserve expects to return to lowering rates in 2024 and 2025.
Earlier in the year, as floating interest rates were around 1.5% and subsequently raised to 2.85% presently, instalments increased by 17%.
If interest rates were to raise further to 4.6%, instalments would have increased by 40%.
Although the increase so far is still manageable for most households, let's look at 7 methods you can use to cushion the impact of further rate hikes.
1. Stretching the tenure of your loan
Assuming a 25 years loan at 3.75%, the monthly instalments are $5141/month. By stretching your loan tenure by another 10 years (check with your bank on your max stretchable term), your monthly instalments would drop to $3530/month. a 32%
Although this increases your total interest payments over the long run, remember that this is just a short term solution to ease your cashflow.
You can always shorten your loan tenure again when interest rates fall or when your finances improve.
2. Draw out a lump sum through equity loans
Ease your cashflow issues by drawing out home equity through the instalments you have already made over the years and the profits you have made (Most homes would have appreciated in price since pre-COVID till today).
Equity loans increase your leverage temporarily but aids in your cashflow as you will then have the finances to repays your monthly instalments until your financial conditions improve or when interest rates fall again.
You may even choose to combine methods 1 and 2 for greater cashflow.
3. Sell a small stake to your family members
Selling a small stake to your family members or spouse can help you tap on their CPF Ordinary Account (OA) to help pay for your monthly mortgages.
Although this will incur some transactional fees like stamp duties and legal fees, this may help you tide over in the short term.
4. Rent out to multiple tenants to increase rent income
The co-living (renting out to multiple tenants) concept can help you increase your monthly rent income to cover the increase in cashflow for an investment property.
Throw in Wi-fi and weekly cleaning services and you will see an increase in the total rent collected. Takes a little more work to manage but every cent counts.
Alternatively, if you are living in the unit, you can choose to rent out a bedroom to generate you some income too.
5. Credit card loans as a last resort
A debt of last resort, you may choose to draw out credit card loans to help you tide over for the time being and use balance transfers between cards to take advantage of lower teaser interest rates between the banks.
6. Offset interest with higher yielding assets
For those with more cash savings but would not like to sacrifice liquidity by paying off your mortgage loans in cash, consider offsetting higher interest by investing your spare funds into Singapore T-Bills or Savings Bonds which earns a higher return (3.5-
4%) than mortgage interest costs (2.75-3.5%) as of today.
This come with shorter term lock-in periods like 6 months to 1 year and can provide you a short term hedge against rising costs.
7. Reduce your mortgage with CPF OA repayments
With mortgage interests costing more today than your CPF OA interest (Aside from your 1st $20K which earns 3.5%), it is wise and prudent to pay down your mortgage loans and sacrifice the interest earned from CPF.
The downside to this is that it is irreversible and you won't be able to withdraw your CPF funds from your home equity unlike repaying with cash.
Despite the Fed narrative that interest rates will be hiking further to stem out inflation, this is likely a temporary situation and is just as likely to fall back to the long term interest rate norm of 1-2%.
On the back of tight supply, high inflation, high employment rates and the rising cost of land, it is still a wiser decision to hold on to properties as an investment to ride out these high inflationary times.
Hold on to your hats in the mean time and utilize the above 7 methods or a combination of them to help you in your short term cash flow constraints.
As always, do reach out if you want to consider any other alternatives, choose the best loan package to go for, or tips on how to restructure and optimise your property portfolio for the coming years.