Landlords grapple with dwindling rental incomes as SIBOR hits record high

Is renting out units still worth it?

Landlords' rental incomes are at risk from the sharp spike in mortgage rates. As the SIBOR climbs to levels not seen in several years, homeowners will have to deal with higher mortgage payments while the pool of potential renters dwindles.

According to UOB Kay Hian, every 1-percentage point rise in interest rates would result in the affordability ratio worsening by about 4 percentage points.

The SIBOR has more than doubled to over 1.0% in the past four months, a sharp spike from just around 0.4%in late-2014.

As an example, UOB Kay Hian used a household with a monthly income of $12,000 who took a $1m loan for 25 years to purchase a $1.25m property with a 20% cash down payment of $250k.

This household’s mortgage payment will rise from $3,769 per month to $4,239 per month as their mortgage rate increases by 100 bp from 1% to 2%.

The household’s rental yield of about 3% from this property would mean a $3,125 per month collection in rents, which is still a positive carry compared with $1,667 per month in interest costs, based on 2% mortgage rate.

“Affordability remains manageable with our sensitivity analysis indicating that approximately every 1 ppt rise in interest rates would result in about S$500 per month increase in monthly mortgage payment on a S$1m property loan with a tenor of 25 years. This would result in the affordability ratio worsening by about 4ppt from 31.4% to 35.3% (measured as monthly mortgage payment divided by monthly household income),” stated UOB Kay Hian.