As of 2024, Singapore’s housing market is characterised by its dynamic nature, influenced by global economic trends and local policy adjustments. The choice between a floating or fixed home loan could significantly impact one’s financial health, considering factors like interest rate fluctuations, loan tenure, and market predictions.
Thus, the decision demands careful consideration, balancing personal financial circumstances with broader economic indicators, ensuring that the selected home loan option aligns with both current affordability and future financial goals.
If you are looking to buy a home in Singapore or intend to at any time in the future, this article will help you make a more informed decision on choosing from fixed or floating interest rates.
Do you value the peace of mind that comes from knowing that your home loan interest rates will not change overnight and you can plan your finances ahead for hassle-free loan repayments? Well, if you do, you should opt for a fixed rate home loan.
A fixed-rate home loan package provides the certainty that the set interest rates will not change during the stipulated time frame, irrespective of changes in the economy or market conditions. You are assured that your monthly instalments will remain the same for a specific period, ranging between one and five years.
However, you must pay a premium for this financial certainty and stability. This is why fixed interest rate loans are generally priced higher than other home loan packages as you usually end up paying more interest on your home loan in the long term.
Contrary to what its name suggests, the interest rate of a fixed-rate home loan package remains fixed only as long as the fixed-rate period lasts. Typically, the lock-in period of a fixed-rate loan is the same as the fixed-rate period.
After this period is over, the interest rates automatically convert into ‘floating rates’. It means, at the end of the fixed-rate period, your fixed-rate home loan will be pegged to SORA, FHR or any other reference rate regulated by the bank. You may have an interest rate equal to or even higher than the prevailing floating rates, depending on the bank spread (we’ll explain what bank spread is later in the article).
The best time to choose fixed-rate home loans is when you are reasonably convinced that the interest rates are going to rise significantly over the next two to three years. In such a situation, you would want to lock in your home loan at the current fixed interest rate (lower than the future rate) and save money in the long run.
However, it comes with two downsides:
If you are willing to pay a little extra for the convenience of setting a fixed amount aside to pay off your monthly loan repayments, then fixed-rate home loans will make a good choice for you.
So, choose a fixed-rate loan package in any of the following scenarios:
Unless you can predict the future, choosing a fixed rate home loan is still a gamble. It all depends on your appetite for risk and financial situation.
A floating rate home loan package, also called a variable interest rate loan, can be pegged to the Singapore Overnight Rate Average (SORA), Fixed Deposit Home Rate (FHR), or Board Rate. Compared to fixed-rate home loans, floating-rate loans are more volatile and subject to the uncertainty of fluctuations in the market fluctuations and revisions.
As of June 30, 2023, the Swap Offer Rate (SOR) ceased to exist, and by December 31, 2024, the Singapore Interbank Offer Rate (SIBOR) will also be completely phased out. These benchmarks are being replaced by the Singapore Overnight Rate Average (SORA), which will become the main reference rate for home loans and other financial products in Singapore.
This shift necessitates the conversion of existing home loans currently linked to SIBOR to an alternative rate. Borrowers can choose to proactively switch to a different rate package by April 30, 2024. If borrowers do not take any action by this date, their home loans will automatically be transferred to the SORA Conversion Package (SCP), starting June 1, 2024.
Floating rates are generally priced cheaper compared to fixed-rate packages, which is why floating rate loan packages are deemed more suitable for homebuyers looking to save every dollar and are ready to bear the risk of fluctuations in market rates.
In a floating rate home loan, the interest rate fluctuates as per market conditions (rise and fall of SORA rates) over the tenure of the loan. If interest rates dip, you enjoy lower monthly instalments and added savings. However, you must cautiously put aside extra funds in case the home loan interest rates surge.
This allows you to save yourself from experiencing whiplash from the sudden rise and fall of interest rates.
The concept of bank spread. A typical floating rate loan quote comprises the base rate plus spread (or margin), and structured like: [reference rate] + [bank spread], where [reference rate] refers to a publicly available market indicator – either SORA, Fixed Deposit or a Board rate while [bank spread] equates to profit margin of a bank.
A bank spread is a percentage that tells how much the bank earns vs how much it gives out.
For example, a typical floating-rate loan quote may look like this: 3M SORA + 0.75%, which means you pay whatever the interest rate is for the 3-month SORA (e.g. 3%) + 0.75% for a total of 3.75%.
There are two most common types of SORA-pegged loans:
1M SORA rate + bank spread, where rate changes every month.
3M SORA rate + bank spread, where rate changes every 3 months.
|Singapore Interbank Offer Rate (SIBOR)
|Based on how the banks are lending money to each other. Collectively set by multiple banks & highly transparent as SIBOR rates are published and monitored. Volatile as it reacts to interest rates set by the U.S. Federal. [To be discontinued from 31 December 2024]
|Internal Board Rate (IBO)
|This floating rate loan is entirely controlled and set internally by the banks and hence lacks transparency. The interest rate usually increases quarterly, depending on market conditions.
|Fixed Deposit Rate (FHR)
|Pegged to the lender bank’s fixed deposit rates with a bank spread and thus relatively stable. Interest rates may change at the discretion of the lender bank (with a 30-day notice period). Partially transparent as rates are published on banks’ websites.
|Singapore Overnight Rate Average (SORA)
|SORA is the newly introduced interest rate benchmark – a volume-rated average rate of all overnight recorded interbank transactions. More stable than SIBOR and SOR.
If you want to benefit from the lower interest rates and have the capability to take on interest rate fluctuations, then floating rate home loans are for you. In a stable interest rate environment, floating rates tend to be a more economical choice.
These loan packages may come with or without a lock-in period. If your loan package has a lock-in period (typically two years), you cannot refinance or prepay your loan during this period without incurring penalty fees of up to 1.5% of the outstanding loan amount.
Floating rate home loans are more suited for homebuyers who have factored in a buffer for a possible increase in interest rates in their home-buying budget. You should pick a floating rate home loan package if:
Here is a quick comparison that would help you decide which home loan will suit your needs better, a fixed rate or a floating rate.
|Fixed Interest Rate
|Floating Interest Rate
|Remains fixed during the lock-in period
|Can fluctuate based on changes in the lender’s benchmark rate
|Easy to budget your monthly finances; the rate does not change frequently
|Hard to budget your monthly finances with frequently changing rates
|Slightly higher than floating rates; changes into floating rate after lock-in period
|Slightly cheaper than fixed rates; remains floating throughout
|Prepayment penalty during the lock-in period
|May allow partial repayment without penalty during the lock-in period
|Typically more expensive than other mortgage loans
|Less expensive than fixed interest rate loans
|Not offered for property under construction, such as a BTO or condo
|Available for property under construction
|More favourable when market interest rates are threatening to go up
|More suitable during the low or falling interest rate environment
If you’re cautious about market conditions and anticipate low interest rates over the next two to three years, opting for a floating rate home loan could be advantageous, especially if the current fixed-rate options are higher than the prevailing floating rates.
Fixed-rate loans provide the benefit of consistent payment amounts, simplifying budgeting and protecting you from sudden rate increases. However, if market rates fall, those on fixed rates might miss out on savings. Conversely, if you believe that current interest rates are favourable and likely to rise, a fixed-rate mortgage could be a wise choice to lock in the lower rates for a set period.
Floating rate packages, often tied to the SORA, offer the potential benefit of reduced rates. Singapore’s interest rates generally follow the trends set by the US Federal Reserve.
With the US expected to have federal rate cuts in 2024, following a period of aggressive rate hikes since March 2022, Singapore’s banking sector is also anticipating a reduction in interest rates. This includes a forecasted decrease in the 3-month compounded SORA rate, a key benchmark for various loans.
For instance, Maybank economists predict that the 3M SORA rate will drop from 3.8% in 2023 to 3.25% by the end of 2024, and further to 2.6% by the end of 2025. This expectation is based on a projection of -75 basis points in Federal Reserve rate cuts in the second half of 2024 and an additional -100 basis points in 2025.
Similarly, UOB forecasts the 3M SORA to decrease from 3.75% as of November 30, 2023, to 3.72% by the first quarter of 2024, and to 3.28% by the end of the year.
As the SORA rate adjusts downwards, it could potentially lower your loan repayments. However, this option does come with the risk of unexpected rate increases, which could happen if inflation trends upwards, leading to higher repayments.
Therefore, if you are comfortable with potential repayment fluctuations and want to capitalise on the anticipated downward trend in interest rates, a floating rate home loan in 2024 might be the more suitable choice.
Always look at your current financial needs first instead of going for the cheapest option straightaway. Compare the best bank mortgage loans and decide on your home loan type depending on your ability to tolerate interest rate fluctuations. And remember that you can always refinance even after you have made your choice.
Do you have plans to sell your property in the next one or two years? If yes, you should consider exploring floating rate packages where some may come with a one-year lock-in period or waiver of penalty due to sale during the lock-in period.
It is possible that in some cases you may have to return the legal subsidy (around $2,000) in the property is sold within the first three years. Note that most fixed-rate home loans do not offer a waiver of penalty due to sale.
Next, but somewhat related, is how you are using the mortgaged property. If it is an investment property, you will aspire to keep the option to sell open at all times for reasons like changes in financial situation, need to offload owing to vacancy periods, or a really good deal. Therefore, you would want to mortgage it on a floating rate that comes with a waiver of penalty due to selling.
Also, rental income can help cover the interest component every month, so that you are also more prepared for variations in interest rates. On the other hand, choosing a fixed interest rate is advisable for the home you are staying in as you are paying for the mortgage from your income every month.
It is interesting to note that your loan quantum can work both ways. This means if the outstanding loan is huge (close to $1m), you have more to lose if your bet on the floating rate goes wrong, making the fixed-rate a safer option.
On the other hand, for a smaller outstanding loan, there is less risk of defaulting on a fixed rate as the amount of total interest you will pay over the principal amount will also be small. There will not be much to lose even if the interest rates unexpectedly rise. However, there are also more profits from a lower floating rate for bigger outstanding loans. Clearly, this is a double-edged sword.
Some banks allow you to pre-pay up to a certain percentage, which works like having a home loan with no lock-in period. Therefore, if you are expecting good bonuses or commissions to be paid out in the next one or two years, floating rate home loans could be a good choice.
If you make regular prepayments in cash, you can reduce more interest costs than you could compared to a home loan refinancing.
This pandemic has made us realise that life (personal and professional) is unpredictable. If you work in an industry that has been threatened, you fear reduced pay, or contemplating a career change; it is advisable to factor the certainty of income into your home loan journey. We know fixed-rate home loans often revert to a floating rate with a higher bank spread when the fixed period ends.
Therefore, it is better to stick to a floating rate home loan with a low spread throughout the tenure of the loan. Even if you have to pay higher interests in some years, it evens out with lower interest rates when the cycle turns. Plus, you save on fees for refinancing or repricing.
If you expect interest rates to rise, a fixed-rate loan could be more suitable, safeguarding you against increasing costs. In contrast, anticipating a decline in rates suggests a floating rate loan might be more beneficial, potentially offering savings over time.
This decision hinges on understanding market trends and economic factors such as inflation and central bank policies. Given the current predictions of easing inflation and potential rate cuts starting from H2 2024, opting for a floating rate loan could be advantageous for home financing.
However, some believe that inflation may persist longer than expected, which might delay anticipated interest rate cuts. The Federal Reserve has indicated that if inflation doesn’t consistently decrease, they may consider increasing rates again. If you align with this perspective, choosing a 1-year fixed-rate home loan package could be a prudent choice for the near future.
Tip: It is best to take advice about available home loan options in Singapore from a professional mortgage consultant. Our experienced Dollarback Mortgage consultants know best and help you understand how to choose a home loan interest rate package, depending on your financial situation.
The Federal Reserve has implemented a series of aggressive rate hikes, increasing its benchmark interest rates 11 times in a row, resulting in a substantial rise of 5.25 percentage points. This strategy was primarily aimed at tackling high inflation and has consequently elevated borrowing costs for a range of loans, including those for businesses and mortgages.
Quick Tip: Read about if SORA will continue to increase in 2024
However, recent forecasts from market analysts and economists suggest a potential shift in this trend. Following a period of the highest interest rates seen in over two decades, the central bank has hinted at the possibility of three rate reductions in 2024. Despite this, market expectations are leaning towards a more significant decrease, with predictions of up to six rate cuts, potentially starting as early as March.
Deciding between fixed and floating home loans in Singapore in 2024 largely depends on anticipated interest rate trends and personal preferences.
If you value certainty and are willing to pay a bit extra for the security of predictable payments, a fixed-rate home loan could be ideal. These loans provide rate stability, particularly beneficial in scenarios like the rising rate environment of 2022 and 2023. However, with the potential for interest rates to decrease in the next couple of years, opting for a fixed-rate loan with a shorter lock-in period might be wise.
Conversely, if you’re comfortable navigating market changes and aim to capitalise on rate fluctuations for long-term savings, a floating rate home loan could be your choice. This option is particularly appealing for those who believe interest rates have peaked or anticipate recessionary pressures.
Floating rate loans adjust according to market rates, offering potential benefits if rates drop in 2024 and beyond. Nevertheless, it’s advisable to maintain a financial buffer to accommodate any unexpected rate increases. Regardless of your choice, it’s important to recognize the significant financial implications of your decision.
It’s crucial to carefully evaluate any associated fees and terms related to refinancing or repricing before finalizing a home loan package.
Ultimately, there’s no universally ‘better’ loan option. Predicting future interest rate movements with certainty is impossible, and with the current uncertain rate environment and forecasts of rate cuts in 2024, it’s vital to consider your financial security, risk appetite, and prevailing market trends when making your decision.
Quick Tip: Find out more about when will mortgage rates go down in Singapore
The prevailing interest rate environment can give you a good idea of which home loan package is more suitable for you. Here’s a snapshot view:
|Decreasing Interest Rate Environment
|Increasing Interest Rate Environment
|Fixed Deposit Rate (FDR)
|Fixed Deposit Rate (FDR)
|SORA or Board Rate
If you are still unsure which type of housing loan is suitable for you or want something that combines the best fixed and floating rate packages, opt for a Two-in-one Home Loan by DBS Bank. This unique proposition allows you to finance your dream home by offering the flexibility to tailor your housing loan in line with your needs.
This combination loan is part fixed and part floating, which means having part of your loan quantum is under a fixed rate package providing stability and peace of mind while also benefitting from floating interest rates for the outstanding loan amount.
You can even diversify your loan over a mix of different loan packages to manage the level of exposure of interest rates. Such loans are designed for borrowers who seek a mix of predictability and flexibility in their mortgage.
|Existing 2-Year or 3-Year Fixed Rate Package
|50% of loan amount
|40% of loan amount
|30% of loan amount
|Exclusive Floating Rate Package
(3M SORA + bank spread with lock-in period)
|50% of loan amount
|60% of loan amount
|70% of loan amount
Please note that the availability of the DBS hybrid home loan is as determined by DBS.
Individuals with existing home loans should actively pursue the most competitive interest rates available in the market. This diligent search for better rates can result in considerable savings throughout the duration of their loans. Engaging in this proactive approach allows them to handle their financial commitments more efficiently and potentially decrease the total expense of their mortgage.
Deciding between a fixed or floating home loan in Singapore in 2024 involves careful consideration. With the possibility of decreasing interest rates in response to the Federal Reserve’s rate adjustments, floating rates could lead to cost savings.
On the other hand, fixed rates offer consistency and predictability, particularly valuable in times of economic uncertainty. Your decision should be based on your financial circumstances, risk appetite, and perspective on market trends.
Remember, you can always switch between a fixed rate and floating rate home loan at any point in time for a nominal fee levied by the lender bank.
Take the first step on a hassle-free home loan journey by getting in touch with one of Dollarback Mortgage consultants who can best advise you on choosing the best home loan package to finance your dream home.
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