RISING interest rates are a feared spectre for many as the recent plunge in the stock market demonstrates, but they are a reason for businessman Christian Chua to smile.
Mr Chua, 39, has just sold his investment condominium unit and some of the cash will go into a fixed deposit account.
It is a nice position to be in as the interest income comes to more than 3.2 per cent a year.
That is a long way up from, say, June 2003, when rates ranged between a teeny-weeny 0.25 per cent a year and 0.9375 per cent, depending on the cash amount and the tenor.
Mr Chua says he sold his investment unit because it had a rental yield of less than 3 per cent a year, which was unattractive.
And he fears that as interest rates rise further, some properties will become unattractive and their prices might fall.
It is not just investors like Mr Chua who are feeling more upbeat about higher interest rates. Retirees, too, are happy because they are the ones who tend to keep most, if not all, of their savings in fixed deposit accounts.
And they tend not to have any debt that would make them worry about rising interest charges.
But for pretty much the rest, the prospect of further interest rate increases spells bad news.
The United States Federal Reserve has raised short-term rates 16 times in the past 22 months and, just when an end to the cycle was widely expected, it signalled otherwise recently.
Interest rates in other parts of the world are also expected to rise further, a prospect that has sent world stock markets plunging in the past three weeks.
Rising rates are bad for stocks for several reasons.
The simple one is that higher rates mean companies have to pay higher borrowing costs. A more complicated one: Higher rates mean that a dollar of a company's future earnings is worth less today.
Outside stock markets, higher rates are still a pain for many, especially those who have borrowed to the hilt - through overdrafts or car and home loans, for example.
People suffer the most from their home loans because these usually make up their largest debt.
That is, unless they were prudent in their borrowing or took a concessionary loan from the Housing Board, which completely spares them any increase in the interest charge.
The HDB mortgage rate remains at 2.6 per cent a year, a rate that has held now for several years.
By comparison, bank mortgage rates have jumped from an average of 2 per cent three years ago to about 4 per cent today.
Mr Vincent Tey, 39, is glad he set aside a buffer when he bought his condominium home in Yio Chu Kang in 1998.
Though his mortgage rate has jumped, Mr Tey, a director at Providend, a financial advisory firm, says he does not have to fork out cash to cover the extra cost.
The payment can be completely covered by the monthly Central Provident Fund (CPF) contributions he and his wife make.
The rate on his mortgage has risen from 1.68 per cent in September 2004 to 3.75 per cent now.
His outstanding loan in 2004 was only $215,000, against the condominium unit's purchase price of $605,000.
The monthly repayment has shot up from $858 in 2004 to $1,147 now, but that is no reason for him to tremble.
He says: 'We've not had to sacrifice any part of our lifestyle because of the higher mortgage cost.'
Hedging with fixed-rate schemes
NOT everyone is as fortunate as Mr Tey.
Citibank's business director of secured assets, Mr Tan Chia Seng, says: 'We're starting to see more customers using additional cash to make their monthly interest/principal repayments, as a result of higher interest rates.
'Typically, they are on variable-rate mortgages, and have not fully budgeted for possible rate rises.'
To hedge against future rises and for more certainty in their future repayments, a number of Citibank customers have converted from variable-rate mortgages to the new Citibank Home Saver Loan, a five-year fixed-rate scheme.
The bank revealed recently that the number of its customers using cash to pay down part of their loans doubled in the first quarter of this year compared with the same period last year.
It said customers would typically plonk down an amount about six times their monthly instalments.
Mr Gregory Chan, the head of consumer secured lending at OCBC Bank, says there has not been a significant rise in the number of customers increasing their monthly home loan repayments with cash top-ups.
Instead, some prefer to make periodic capital repayments with CPF monies or cash, which generates greater saving on the interest they pay.
Do not worry too much about rate hikes, though.
In its latest financial stability review, the Monetary Authority of Singapore (MAS) said on Friday that rising rates have had a minor impact on the ability of households to service their housing loans.
Rates are not likely to rise further by a large margin, says Ms Tay Huey Ying, an associate director of research and consultancy at Colliers International, a real-estate consultant.
People have a cushion against hikes because wages are expected to continue to rise as the economy grows, she says.
What about the impact on property prices?
'Generally, interest rates do not directly affect the prices of properties,' she says.
They can affect affordability if a rise in rates is not matched by a corresponding rise in people's income.
Any price movement in mass-market projects will depend on how fast the oversupply can be absorbed and how tenacious the bull run in the luxury market proves to be, she adds.
In the automotive market, the Singaporean's love affair with the car has cooled, going by the prices of Certificates of Entitlement (COEs).
Prices now hover at around rock-bottom levels of between $10,100 and $11,800.
If the cost of borrowing continues to rise, logically COE prices may dip further - until perhaps the price fall compensates for the higher interest cost, more or less.
'As COE and car prices start to fall, consumers may flock back to car showrooms,' says Associate Professor Benedict Koh of the Singapore Management University (SMU).
Associate Professor Annie Koh, the associate dean of SMU's Lee Kong Chian School of Business, says that people have become more prudent in their spending.
'They don't buy fully on leverage now. We are seeing more astute purchases. It's not built on credit because people don't feel rich enough. It's built more on a balance between credit and wealth,' she says.
'It's an interesting change. People want to be cash-rich. So, rising interest rates affect more on the saving side than on the buying side,' she adds.
At the same time, she says, banks are now better able to discern the credit-worthiness of loan applicants.
The banks have set up Credit Bureau (Singapore) to track the promptness of repayments and defaults by consumers.
The MAS on Friday also noted that home buyers have become more cautious about large loans - specifically loans of above 80 per cent of the home value.
New mortgages with such high borrowings fell from 19.6 per ent of total new mortgages last October to 15.3 per cent in December, it said.
Dr Lynda Wee, a retail marketing expert and the director of the Centre for Innovation and Enterprise at Republic Polytechnic, says higher interest rates could reflect greater demand for loans by businesses.
It suggests a buoyant economy where there are jobs and rising incomes, and people can thus bear higher interest costs.
Hence, 'retail spending would be the same, except that people may change the mix of value and premium shopping', she says. The price-sensitive types will cut out the frills in their purchases.
And those who postpone their purchase of a big-ticket item such as an upgraded home or a car could instead indulge in a smaller luxury item such as a branded watch, she figures.
chanteik@sph.com.sg
