Shifting gears: Navigating the new normal of falling interest rates

WITH global interest rates heading south, you might be wondering what that means for your everyday finances. On the one hand, falling rates spell good news for those who are servicing their mortgage, particularly if they are on a floating rate. On the other hand, the returns you get from your savings accounts, fixed deposits and certain investments might shrink.

Many have enjoyed relatively higher returns in low-risk investments – such as Singapore Savings Bonds (SSBs) and Treasury bills (T-bills) – over the last two years. The current low rates is a wake-up call for consumers to be proactive and review their financial strategy. Ignoring these changes could mean missing out on opportunities or worse, seeing your hard-earned savings lose their value to inflation.

When the US Federal Reserve lowers its benchmark interest rate, it sets off a ripple effect across the global financial system. For consumers, this generally means cheaper borrowing and lower returns on savings.

As the interest rate landscape shifts, your approach to savings and investments warrants a fresh look.

According to DBS’ chief investment officer (CIO), we are seeing signs of a slowing economy with a softer job market but a full-on recession is unlikely.

So, what are some financial portfolio adjustments to consider?

Moving away from short-term fixed income

The appeal of T-Bills and similar short-term government debt diminishes significantly when interest rates fall as their yields, once competitive, will decline.

As of Oct 9, the cut-off yield on Singapore’s six-month T-bill slipped to 1.41 per cent, which is a far cry from the 3.7 per cent per annum rate in early 2024.

Singapore Savings Bonds (SSBs) will likely see new tranches with lower headline interest rates. While existing SSBs with their flexibility still hold value, new allocations should be carefully weighed against alternative investment opportunities that offer potentially better returns in a low-interest rate environment.

The latest SSB rate for October 2025 shows a one-year return of 1.39 per cent and a 10-year average return of 1.83 per cent. At the end of 2023, the average per annum return for SSB was around 3.2 per cent.

The implication is clear: Consider reallocating new money or maturing funds from these short-term, low-risk instruments into areas with potentially higher growth or more favourable long-term prospects, in line with your individual risk profile.

Seeking opportunities in risk assets

To navigate the current lower rates environment, the DBS CIO recommends gaining exposure to risk assets that would offer resilience in demand despite overall macro moderation and/or are beneficiaries of falling bond yields and US dollar weakness.

• Asean equities

With a combined population of 672 million, Asean is a great domestic consumption play as its young population embraces digitalisation. The “China +1” strategy has also helped emerging countries like Vietnam as they moved up the value chain and pivoted into the manufacturing of smartphones and electric vehicles.

• Defensive sectors: utilities, consumer staples and healthcare

An analysis of the S&P500 sector performance during past interest rate reduction cycles indicates that certain defensive sectors, namely utilities, consumer staples, and healthcare, typically demonstrate stronger returns in the three months following an initial rate cut. This outperformance can be attributed to the consistent demand for the essential goods and services these sectors provide, making them less susceptible to economic fluctuations.

• Asia Reits

Asian real estate investment trusts (Reits) are well-positioned to benefit from impending interest rate reductions. Their business model, which relies on debt financing for property acquisitions, makes them particularly sensitive to borrowing costs.

Rate cuts are beneficial for a few reasons. First, lower interest rates directly translate to reduced financing costs for Reits, boosting profitability. This improved financial health allows for higher distributions to investors, enhancing their appeal as income-generating assets.

Second, Asia Reits offer a compelling dividend yield of 6 per cent. In a declining interest rate environment, this yield becomes even more attractive to income-focused investors, especially as bond yields decrease. Furthermore, a weakening US dollar may encourage international investors to seek higher returns outside America, further increasing demand for Asia Reits.

Gold continues to appeal

In 2025, gold continued to demonstrate resilience and demand, breaching the US$3,500 per ounce mark and taking its year-to-date performance to more than 35 per cent gain. The long-term investment case for gold remains clear and compelling for several reasons, including the likelihood of increased money supply, anticipated interest rate cuts and its inverse relationship with the US dollar could further boost returns.

Geopolitical instability in the Middle East and Russia-Ukraine further enhances gold’s role as a safe-haven asset. Additionally, robust central bank purchases (119.2 tonnes in June 2024) and projected increases in global reserves highlight gold’s growing importance as a hedge against de-dollarisation and currency devaluation.

DBS CIO’s H1 2026 target for gold is US$4,000 per ounce.

Mortgage refinancing: Opportunity to save

Falling interest rates present a significant opportunity to optimise your debt, translating into substantial monthly savings.

If you’re a homeowner, a declining interest rate environment often signals a prime opportunity for mortgage refinancing. This is particularly true if you secured your current mortgage when rates were higher, or if you are freshly out of your locked-in period.

Refinancing allows you to replace your existing mortgage with a new one at another bank at a lower interest rate, potentially reducing your monthly payments, shortening your loan term, or even both.

Before diving in, consider the costs associated with refinancing – these fees can come up to a few thousand dollars – and ensure that it is worth your while to go through the administrative process.

The downtrend in interest rates has led to a noticeable increase in demand for new home loans that offer lower fixed interest rates.

Taking the new POSB HDB home loan as an example: It offers a three-year fixed home loan interest rate of 1.7 per cent, with the potential for lower rates depending on eligibility. For a S$400,000 loan, refinancing from an HDB loan to the POSB HDB home loan would translate to an estimated S$3,600 in first-year savings – which could cover round-trip flight tickets from Singapore to London for a family of three.

Before deciding, homeowners should first explore options to reprice their loans, which involves switching to a different interest rate package within the same bank. Through repricing, homeowners can potentially benefit from more favourable rates without incurring new legal or valuation fees, or being subjected to new lock-in periods and claw-back clauses that are often associated with refinancing.

Recalibrating your finances

While the era of exceptionally high-yield savings may be fading, this new normal isn’t a cause for alarm, but rather a call to action – an opportunity to refine your financial strategies for greater resilience and growth. Here are four considerations:

• Review your current finances

Gain a clear understanding of your present financial situation by assessing your income, expenses, savings, investments, and debts. Knowing precisely where you stand is the foundation upon which all effective financial planning is built. Understand your risk tolerance and your short-term and long-term financial goals.

• Stay informed

Economic conditions are dynamic so stay informed about market trends, interest rate forecasts and broader economic news. You’ll be better equipped to adapt your financial plan proactively rather than reactively.

• Embrace opportunities

While falling interest rates present challenges for savers and those in retirement seeking income, they also unlock significant opportunities for strategic adjustments. It’s a chance to reduce the cost of your debt, potentially enhance your investment portfolio’s growth prospects, and solidify your long-term financial health.

• Consult a financial adviser

Seek guidance from a qualified financial adviser who can provide personalised advice tailored to your unique circumstances, help you optimise your portfolio, evaluate refinancing opportunities, and craft a retirement income strategy that aligns with your goals in this evolving interest rate environment.

By taking these steps, you can confidently navigate this new normal and continue building a secure and prosperous financial future.

The writers are from DBS Bank. Lorna Tan is head of financial planning literacy, and author of bestsellers Money Smart and Retire Smart. Lynette Tan is a financial literacy specialist.