How do rising interest rates affect property buying and mortgage loans?

With the recovery of the US economy together with rising inflation, the US Federal Reserve has tightened their monetary policy and announced the start of an interest rate hike cycle. The Fed announced a 0.75 basis point interest rate hike on 15th June, with the expected eventual interest rate to range from 1.5% to 1.75%¹. This hike in the US interest rate will no doubt have an impact on central bank interest rates and financial markets across the world. How will property prices be affected by this interest rate hike? What will this mean for the mortgage ratees and the property market?

The largest interest rate hike by the US since 1994

The Federal Reserve said that the US unemployment rate has remained low in recent months and job growth has been strong². Additionally, energy prices have increased due to international events, and inflation also increasing due to tariffs and other factors². In hopes of countering inflation, the Federal Reserve has hiked interest rates³. The latest US Federal Reserve's interest rate hike of 0.75 basis points is the largest since 1994, and it is also expected for interest rates to be raised to 3.4 basis points within this year, 1.5 percentage points higher than forecasted².

How will the US interest rate hike increase the cost of homeownership?^4,5

Several financial institutions believe that with the increase in US interest rate, many banks may have the opportunity to increase their prime rate based on their own funding cost structure, which may eventually affect the borrowing costs of citizens or investors.

Those interested in buying a car or a home and do not think that the interest rate hike would affect them, may currently be overlooking the potential impact of the rate hike. They should evaluate their ability to afford the impact of the rate hike and check whether banks have increased their loan rates in the past due to the rate hike.

Buying a house involves taking on large amounts of mortgage loans, coupled with a long repayment period, even slight changes in interest rates can affect affordability. Therefore, whether you are planning to buy a home or a car or financing your home through a mortgage loan, the increase in interest rate may affect your property and mortgage plans. It is essential that you carefully evaluate and manage the relevant risks. If you decide to finance your homes with floating interest rate mortgages, do pay extra attention to changes in mortgage interest rates.

When it comes to the property market, interest rate hikes are not the only factor affecting the market. Other important factors include the current housing supply, overall market sentiment and economic development. Thus, we cannot make a general assumption on the direction of the property market based purely on changes in interest rates.

Should you choose a fixed interest rate mortgage during an interest rate hike cycle?

In a low-interest environment, choosing a fixed interest rate mortgage may give a lower interest payment. Even if the market rate increases due to tight market funds, it will be more attractive as there is a locked-in interest rate cap to provide protection. During an incoming interest rate hike, there is a probability that the interest rate cap on fixed-rate mortgages will follow the increase in variable-rate mortgages. In theory, choosing a fixed-rate mortgage can help to hedge against the risk of increasing interest rates. However, if there is no significant interest rate hike during the mortgage repayment period, those who choose a fixed-rate mortgage may end up paying more interest than those who choose a variable-rate mortgage.

Plan carefully before buying a property

Buying a property is a significant milestone in life, and thus we should consider carefully before making any decision. It is important to anticipate how to deal with uncertain scenarios. Changing interest rates and financial environments are only a small part of it. Once you meet with an unexpected situation, such as losing the ability to work or even passing away, have you thought about how to handle the property which has not been fully paid off yet?

Purchasing a life insurance policy can be one of the ways to counter such expected scenarios. The life insurance policy can provide financial support to your family members in the form of a lump-sum death benefit. This lump-sum cash can then be used to pay off any remaining mortgage, preventing it from becoming an added burden on your family members, and can help to avoid the financial struggles of losing a loved one.

Factors to consider before buying a term life insurance policy

There are many types of term life insurance policies available in the market, here are some factors you should consider before deciding:

• The premium and amount of coverage
• Terms of the plan and any relevant sales documents
• Renewal period of the policy
• Cooling-off period for the policy