Fixed vs floating home loan

Fixed vs. Floating Home Loans: Which One Should You Choose?

If you have been shopping around for a home, chances are you have come across the different types of home loans you can take. In Singapore, you can choose between two types of home loans – a fixed or a floating home loan.

Choosing the right home loan for you and your family can be tedious. This article will help you decide on the best home loan for you, depending on your circumstances. Different loans suit different types of borrowers.

Fixed vs Floating Home Loan

The key difference between a fixed and floating home loans is that fixed home loans have a fixed interest rate over the lock-in period, while the floating-rate homeland has fluctuating interest rates. Fixed-rate home loans are suited for people who prefer paying the installments in cash and prefer financial certainty. 

Fixed Rate For Home Loan Floating Rate For Home Loan
Interest rates remain fixed throughout the tenure or for a specific period. Interest rates fluctuate.
Interest rates are usually 1%-2% higher than the floating rate. Interest rates are low
A penalty of up-to 4% for prepaying. No prepayment
Anytime convert to the floating interest rate with a conversion cost. Anytime convert to fixed interest rate without any cost.
Comes with a lock-in period of 2, 3, or 10 years No lock-in period
A home loan balance transfer is not possible. A home loan balance transfer is possible.

 

Fixed Rate Loan: Best for Low-Risk Buyers and Buyers with Value for Stability

Fixed home loans are loans whose rates remain unchanged throughout their tenure or lock-in periods. These loans often average between 1 to 5 years. Their interest rates range from 1.23% to 1.8% per annum depending on the lender and the lock-in period you choose.

Once the lock-in period is over, your home loan is pegged to a board rate, SIBOR, SIRA (Singapore Overnight Rate Average), or FHR, depending on your chosen loan package.

Fixed rates are often higher than floating rates, but borrowers enjoy peace of mind knowing that their loan repayments will not be affected by any rate hikes. Since we live in very unpredictable economic times, this feature goes a long way in helping budget your income.

Additionally, you will be expected to repay the loan in equal installments over time.

The Pros

1. The Interest Rate Remains Constant

One of the main features of a fixed rate home loan is that it remains the same even when the market prices change. The central banking authority often changes the rates banks can borrow or lend.

2. Easier to Plan Your Budget Around

With a fixed home loan, the borrower can lock the ideal rate depending on their budget, making it easy to plan around their finances. When you choose a particular rate, you will know exactly how much each installment will cost during the loan tenure.

3. It Is Easier to Understand

Fixed home loans are very easy to understand. They also have very little variation from one lender to another. Fixed home loans are the ideal choice for anyone with a fixed budget since they will require you to pay the same amount of installments (EMIs) throughout the loan tenure.

The Cons

1. It Is More Expensive

The fixed rate home interest rates are constant throughout the lock-in period and cannot be revised. This means they are often 1.5% or 2% higher than the floating interest rates. These home loans offer stability in their loan installments, but they could be costlier than floating home loans.

2. It Is Hard to Get a Loan When the Interest Rates are High

When the interest rates are high, it is hard to qualify for a loan. Loans with a high-interest rate require you to make higher payments.

3. No Chances of Paying Less After Rates Fall

Your EMIs remain unchanged even after the industry’s rates decrease. Some fixed rate loans may remain fixed for a certain period only.

Floating Rate Home Loans – Ideal for Buyers Seeking an Opportunity to Save

Also referred to as adjustable-rate home loans, a floating rate loan offers an interest rate that tends to fluctuate with the changes in market conditions. Floating home loans are the opposite of fixed rate home loans, whose interest rates remain unchanged throughout their tenure.

These loans are often adjusted on a periodic basis depending on the loan’s terms and conditions. In Singapore, floating home loans are pegged to the following circumstances: SIBOR (Singapore Interbank Offer Rate), FHR (Fixed-Deposit Home Rate), or Board Rate. Floating home loans are more volatile since they are often subject to market fluctuations and revisions.

With floating home loans, you can enjoy saving on the interest rates, but you also risk paying more if the interest rates skyrocket. Banks, however, offer a 30-day advanced notice if the rate changes and offer you a chance to refinance your loan. Please note that you may incur hefty legal fees, so reading through a package’s fine print is important.

The Pros

1. Linked to the Repo Rate

The floating home loan interest rates are linked to the repo rates. These are the rates that banks borrow from the Monetary Authority of Singapore. Floating loans are more cost-effective than fixed rate interest rate loans in the long run.

2. They Fluctuate, But They Are Cheaper

Floating rate home loan rates depend on market trends and can often fluctuate in the short term. However, even with the fluctuations, they are often cheaper than fixed rates.

No minimum limit is allowed for a rate hike; the borrower ends up saving more with the floating rate interest regime since the tenure of the loan is often extended rather than increasing the monthly installment in case the interest rate climbs. If the market interest reduces, the floating rates are adjusted again to reduce the loan tenure rather than impacting your monthly installment.

3. No Prepayment Penalties

Floating rate home loans charge no prepayment penalty. However, this is not the case with fixed-interest rates since you have to repay your loan based on the planned repayment period or get charged with a prepayment condition.

The Cons

1. Floating Rate Home Loans Are Unpredictable

Floating rate home loans are unpredictable, making it difficult for borrowers to plan their budgets accurately. It is not the best option for someone who loves certainty and stability on their monthly installments since the interest rate keeps changing.

2. It Can Attract Higher Premiums

When the market is volatile, it might force financial institutions to charge higher premiums than the regular interest rates, affecting the borrower’s pockets.

3. It Makes Budgeting for Your Finances Harder

When the interest rates changes, the monthly installment could potentially change. This can often lead to uncertainty when it comes to your monthly financial planning.

trinket form house with key chain coins

What Are the Factors to Consider When Choosing Between Fixed and Floating Rate?

Here are some pointers to help you make the smartest decision when choosing between the two home loans:

  • Interest Rate Cycle

The interest cycle is one of the most important factors when deciding the type of loan you can take. One of the best ways to forecast the interest rate is to look at the historical charts.

It is quite easy for anyone to see how the interest rate can recover after a market crisis. You can also work with a trusted home loan broker who will advise you best on the loan you should take. They are in a better position to tell if you should expect interest rates to rise or fall.

  • Loan Quantum

The smaller the outstanding loan, the lesser the risk for hedging on a fixed-rate home loan and vice versa. Therefore, if you have a smaller home loan, it is better to go for fixed interest and a floating interest rate for the bigger loans. You stand to save more with a large loan on a floating rate.

  • Investment Property Vs. Own-Use

If you are servicing one of your existing home loan, we advise you to opt for the fixed rate packages for the home that you stay in. This is because you pay for your home from your personal account, while the investment property mortgage comes from the rental income. There is more leeway to accept fluctuations on floating rate packages for rented properties as long as the rental income can cover the interest costs.

  • Flexibility to Prepay or Sell the Property

If you are looking for a property to sell, you can look for a lower interest rate since it takes less time for a sale to materialize. You can also choose an adjustable package that allows the bank to waive the penalty if you sell the property during the lock-in period. Some packages allow you to only prepay up a certain percentage with no penalty.

  • Certainty of Income

If you work in an industry that can affect the certainty of your income, you must factor it in when deciding the type of mortgage you will go for. Remember that it might be hard to refinance your home loan if you are out of a job in the future. If this is the case, you must choose a floating rate home loan with the least interest rates and spread when the lock-in period ends.

  • Your Peace of Mind

Fixed-rate home loans are your go-to if you are looking for the best option with stability and no fear of rising interest rates. You will get utter peace of mind even if you might end up paying a little more than having the floating rate home loan.

Closing

Choosing the best home loan package for you is not only about finding the best interest rate but choosing whether you want a fixed or floating home loan.  A fixed home loan means you get the same interest rate over a given period regardless of the market conditions. A floating rate home loan means that the interest rates will fluctuate depending on the market rates, which affect the repayment period and the monthly repayments.

Also: Are You Considering Getting A Bridging Loan?

Key Takeaways

  • Fixed Rate home loans have the same interest rates regardless of the market conditions.
  • Floating home loans have fluctuating interest rates depending on the market conditions.
  • If you always want to be certain about the amount you will pay monthly, go for the fixed-rate home loan.
  • You can choose the floating rate package if you want to save money in the long run.

If you’re looking for a loan with manageable repayment terms, Instant Loan provides you with the best personal loan offers from Singapore’s best money lenders. Fill out our quick form today to get your loan quotes, free of charge.

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