The ultimate home buyer’s dilemma: whether to choose predictable fixed-rate loans for peace of mind or take advantage of the floating rate home loans if in a low-interest-rate environment. For now, as 2023 has seen our interest rates soaring, a fixed interest rate home loan might be the better and less stressful option.
If you are looking to buy a home in Singapore or intend to anytime 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’. This means your fixed-rate home loan will be pegged to SORA, FDR or any other reference rate regulated by the bank at the end of the fixed-rate period. 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 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 and revisions.
Please note that all existing SIBOR and SOR (Swap Offer Rate) will be phased out by 2024 and 2023 respectively.
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.
In other words, you can save yourself from experiencing whiplash from the sudden rise and fall of interest rates by choosing a floating loan package.
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 + 0.50%, which means you pay whatever the interest rate is for the 3-month SORA (e.g. 1%) + 0.50% for a total of 1.5%.
There are two most common types of SORA-pegged loans:
1-month SORA rate + bank spread, where rate changes every month.
3-month 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.|
|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 in the following circumstances:
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 are sceptical about the market conditions and believe that the interest rates will keep low for the next two or three years, we would recommend switching to a floating rate, especially if your fixed-rate option is higher than the prevailing floating rates.
On the other hand, if you are confident that the prevailing interest rates are reasonable and the future interest rates are likely to go up, it becomes instinctive to consider a fixed-rate scheme and secure the relatively lower fixed rates for a specific period.
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 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.
Even if you have the layman’s knowledge of reading the historical charts on interest rate trajectory, you can easily make out that interest rates never recover in a V-shaped pattern after a crisis.
Since interest rates have started to rise from the lowest point in the interest rate cycle, it will take some years to reach the cycle peak with bumps along the way. History is proof that interest rates never spike in a straight line without bumps.
However, there is another set of people who think inflation will come up much faster than expected and are preparing for rate hikes in the next few years (2023 and 2024). If you share the same outlook, you will naturally want to go for a fixed rate.
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.
Amid rising energy prices and a worsening inflation picture, U.S. Federal Reserve has raised its benchmark rates by another quarter percentage point (as of May 2023). Increased mortgage rates will mean higher loan repayments to homeowners.
Quick Tip: Read about if SORA will continue to increase in 2023
At the end of the day, there is no better loan per se. None of us can predict the future and tell the exact trajectory of interest rates in the coming years. It is all about personal preference, needs and risk appetite.
We can say there is an element of personality involved in the choice you make. If you are okay with paying a premium for peace of mind and ease of financial planning, fixed-rate home loans may work better for you.
However, if you understand the market conditions and prefer tracking fluctuations in interest rates to save money in the long run, go for a floating rate home loan. No matter which way you go, be aware your decision is going to impact your financials.
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:
|Potential Savings||Decreasing Interest Rate Environment||Increasing Interest Rate Environment|
|Moderate||Fixed Deposit Rate (FDR)||Fixed Deposit Rate (FDR)|
|Lowest||Fixed-Rate||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.
|Option A||Option B||Option C|
|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||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.
To conclude, you can’t predict future market rates, and therefore it is hard to say that one kind of loan is better than the other. Keep a note of the latest mortgage industry trends and developments, keep a long-term view as you make financial decisions and set aside an emergency fund for rainy days.
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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