Home Loan – Fixed or Floating Rates?
The difference between fixed and floating interest rates can be an expensive one. Depending on how much you owe on your mortgage, a variance of 1% in your home loan interest rate can cost – or save you thousands of dollars a year.
So whether you’re thinking about taking a bank loan to purchase your first property or curious about refinancing – it pays to know the difference between fixed and floating interest rates.
What’s the Difference Between Fixed and Floating Rates?
When it comes to choosing a home loan or refinancing, you’ll have the choice to select either a fixed or a floating interest rate.
Here’s the difference between the two:
- Fixed Rate: Fixed-rate home loans retain the same interest rate over a set period of time up to about 5 years. That means your interest rate and your mortgage repayments will be fixed, and it will remain the same over the “fixed” period of time. Though, it also means that you’re locked in with the particular bank for that specific period of time.
- Floating Rate: Floating-rate home loans fluctuate based on the movement of SIBOR rates on a monthly or 3-month period (*SOR rates alre also used, but to a lesser extent). That means your interest rate and your mortgage repayments will change every 1 to 3 months.
*SIBOR (Singapore Interbank Offered Rate) is set by the Association of Banks in Singapore (ABS) as a daily reference rate based on the interest rate which banks offer to lend unsecured funds in between them.
*SOR (Swap Option Rate) is another reference rate set by the ABS by the rate at which the same loan amount is borrowed in US dollars and is heavily influenced by the US Fed rate.
For a quick look at how fixed- and floating-interest rates affect your home loan, here’s a chart showing the difference for a $800,000 mortgage (for 25 years) for the first year:
How Do You Choose Between Fixed and Floating Rates?
In Singapore, floating rates are much as 1% lower than fixed rates – meaning that you can save a substantial amount of money.
However, the risk with floating rates is that they are very susceptible to market conditions, which can drive them above fixed interest rates. Currently, SIBOR is rising sharply making the choice between fixed and floating rates even more difficult.
Choosing between a fixed or floating interest rate really comes down to kind of borrower you are – and how much risk you want to take for potential savings.
Here are the key benefits of taking a fixed interest rate:
- Security and Consistency: Your home home loan interest rate and repayments will remain the same – regardless of market conditions.
- Predictability and Planning: Because your home loan repayments are consistent and predictable – you’ll be able to plan your budget without worrying about rising monthly repayments.
As a general rule, if you’re a person with a limited budget who wants to forecast what you’ll be paying so you can plan your finance better – then go with a fixed rate.
Here are the key benefits of taking a floating interest rate:
- No Lock-in Period: Unlike fixed rate mortgages, floating rate home loans are available without lock-in periods – which is handy if you are looking to refinance or make prepayment.
- Lower Rates (usually): Floating rate mortgages typically have much lower interest rates than fixed rate home loans – unless interest rates are on the rise.
- What Goes Up, Must Come Back Down: Interest rates rise and fall in cycles, so even if floating rates are higher than fixed rates – they will fall again at some point, while fixed rates remain static for duration of the home loan package.
As a general rule, if you’re a person who has the financial means to withstand interest rate fluctuations that may increase your mortgage repayments – then go with a floating rate.
For more info on finding the best home loan interest rates in Singapore, visit iMoney’s Home Loan Comparison page.
For more financial tips and tricks to optimise your financial lifestyle, visit imoney.sg and learn all the best moves to make with your money.