How home owners can cope with rising monthly mortgage payments
How home owners can cope with rising monthly mortgage payments? Interest rates have been raised to combat inflation, rising borrowing costs for all forms of loans, from houses and automobiles to education. How can consumers and households keep their finances afloat in the face of rising food, transportation, and utility bills?
For starters, people can consider one of their most significant financial obligations: their home. While most people are aware that they should buy a home within their means, what is the benchmark to aim for? A residence should cost no more than 10 years of a person’s income, according to Ms Lee Meng, executive financial services consultant at financial services business Gen Financial Advisory.
She also urges families to estimate affordability using only one income (the more dependable one). She claims that this will act as a safety net in the event that a couple’s income is impacted due to one party’s inability to work. A residential home such as upcoming AMO Residence in Ang Mo Kio, is also a long-term financial commitment, with loan terms ranging from 35 years to 50 years. Ups and downs in the financial markets, as well as changes in the market climate, might affect home owners during this span.
In anticipation of increased interest rates, some homeowners have already reviewed their home loan packages, with some banks even warning consumers of higher rates. The publicly published rates on the banks’ websites all showed an annual increase of between 0.1 and 0.65 percent.
Mr Dallas Goh, a 31-year-old lab technician, refinanced his UOB loan last month, opting for a two-year fixed rate of 1.45 percent each year. He also used the chance to repay 10% of the amount he had borrowed. A smaller loan amount equals cheaper monthly mortgage payments. Mr Goh estimated that he would save about $300 per month in total.
Paying down a debt is a very personal decision that is based on the circumstances of each household. Mr Goh chose to sell part of his shares and use the proceeds to pay off a portion of his mortgage.
Mr Christopher Tan, chief executive of wealth management and advice business Providend, said that for other homeowners, for example considering buying AMO Residence, considering refinancing their mortgage, the decision may come down to whether they can use the extra cash to make higher returns than their mortgage rate. He also advised them not to pay down their loan balance if they are able to.
However, homeowners must consider whether they want the peace of mind that comes with having a smaller loan balance. “Everything must be based on the concept of a life decision. What are you doing to give yourself that sense of calm?” Mr. Tan continued.
Some households, however, may not be able to lower their loan principal due to budgetary constraints. These households, who are also likely to be hit hardest by rising interest rates, may be forced to prolong their loan terms in order to reduce their monthly payments.
Still, Mr Tan advises homeowners not to extend their loan terms above their desired retirement age, as this would result in a higher interest expense. More money from the Central Provident Fund (CPF) Ordinary Account can also be considered (OA).
Consider a homeowner who pays half of his monthly mortgage with cash and the other half with OA savings. When monthly mortgage repayments rise, Ms Lee of Gen Financial Advisory says the owner might increase his OA contribution to keep his cash commitment the same.
When a homeowner sells his property, however, they must refund the principal amount borrowed from their OA, plus interest. If they had maintained the money in their CPF accounts, they would have earned the same amount of interest. The OA’s current interest rate is 2.5 percent per year.
The second point to keep in mind is that spending CPF savings will deplete one’s retirement reserves.
Mr Tan of Providend explained that many CPF members have low OA amounts since they are spending practically all of their OA savings to service their house loans.
He continued, “A lot of folks tell me that they don’t have much in their CPF OA since they spent it to pay for the house.”
The four key phases of a business cycle are expansion, peak, contraction, and trough, after which the cycle repeats.
Inflation and rising interest rates imply that the economy is in expansion mode and nearing its peak.
Before hitting a trough, the economy will begin a contraction/recession period after reaching its peak.
The economy will then rebound from its low point.
This suggests that the current trend of rising interest rates and inflation is only temporary, despite the fact that uncertainties like the Ukraine conflict and the Covid-19 outbreak may throw up unexpected results.
Households and consumers will have to dig down and ride out the storm regardless of where the headwinds come from.
“You just must accept that you will save less over the next one or two years, and that is great. This is a temporary condition “Mr. Tan stated.
Click the image to read the full details of report.