In the treacherous world of loans, it may seem that every other loan package is painful, and that the only real winner is the bank. Well, you are probably right. It’s not all that bleak though.
You can’t do much about property prices or the fact that you have to take on a massive loan that takes thirty years to pay back, but you can most certainly do your due diligence to ensure that your debt doesn’t cause you any more anxiety than it already does, and hopefully, you manage to get it down to the lowest that it can be.
The closing gap between Fixed and Floating Rate Home Loan Packages
In the not-too-distant past, interest rates have been cruising along mercifully at just below 0.5% and most people have no qualms choosing a floating loan (SIBOR or SOR-pegged) package. However, with the recovery of the US economy and US Federal Reserve increasing its interest rates, the SIBOR, which takes its cue from US rates, is set to follow suit.
The current 3-month SIBOR rate stands at 1.2525%, the highest it has been since year 2009. Add on the bank’s fixed spread, where a competitive range lies between 0.70%-1.00%, we’re looking at a total of 1.95% and upward.
And so, how does this compare to fixed rate packages? Let’s look at two of the more attractive fixed rate home loan packages in the market today, from Bank of China and UOB.
Bank of China and UOB Fixed Rate Packages
Here’s a snapshot of how these two fixed rate packages look like:
Assuming you are on a SIBOR package, and are paying a total of about 1.95% or higher now, you’d realise that even before we take into account the increases that are about to come, the fixed rates from BOC and UOB are pretty much already at the level that floating rates packages offer at least for the first two to three years.
In this respect, you can consider refinancing to a fixed rate package as this will shelter you against any further increases in the Fed’s, and hence, SIBOR rates.
UOB expects the 3 Month SIBOR to reach 1.8% by end of 2016, while UBS’s analyst foresee it to more than 2.2% in the next 12 months. Regardless of whose team of analysts have got a better crystal ball or error-free spreadsheet, what this means is that switching to fixed rate packages from SIBOR-pegged ones will probably save you a rather significant amount.
However, as ‘thereafter’ rates are a lot higher, do remember to review the market offerings again when the fixed rate period is over. This also coincides with the expiration of the lock-in period and you can refinance without penalty.
Why else would you choose fixed rate packages?
In addition to the environment of rising interest rates, there are other reasons that may make fixed interest packages more appealing to you.
Easier Financial Planning
Interest rate fluctuations (specifically upward swings) can cause quite a lot of headache in your expenses and debt budgeting. If you are planning to budget and save for any event at all in the short term, then having one less variable to deal with will give you greater certainty. This is especially so if you are making your monthly repayments with your disposable income, and not CPF.
You don’t have much room to handle interest rate hikes
If your current and near-term financial circumstances are looking tight, and you are already up to your neck in bills and payments, then fixed rate packages will help ensure that your debts don’t spiral out of your control.
Having a fixed rate for the first two to three years will give you additional time to work on getting your finances in better shape.
Peace of mind
You could be making your repayments with CPF, and have some financial breathing space to handle interest rate hikes.
However, there’s something that’s not quite tangible, and that is peace of mind. Consider that paying a fixed rate is akin to paying an insurance premium on your home loan. It may or may not be higher than floating rates, but the certainty gives you a peace of mind and you don’t have to wonder what‘s in store for you the next time you receive your statement.
Remember that regardless of what type of package you choose, whether or not you can lessen the cost of your housing debt depends on how attuned you are with the market conditions and how well you know your own finances.
Still in doubt? Don’t hesitate to get in touch with iMoney’s mortgage consultants.
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