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When To Pick A Floating Rate Home Loan Singapore 2024?

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In Singapore, where many homeowners opt for home loans for property purchases, understanding the nuances of different loan packages is crucial. In 2024, it’s vital to be informed about the direction of interest rates in Singapore and the implications for choosing a floating rate home loan.

With mortgage rates rising since March 2022 and the trend persisting in 2023, floating rate loans have become pricier. Yet, the predicted interest rate cuts in 2024 could make SORA-linked loans more attractive, despite the need for risk tolerance due to possible fluctuations in interest rates.

This article aims to delve into floating rates, exploring their recent hikes, advantages, disadvantages, and the scenarios where opting for a floating rate loan is most beneficial.

Firstly, let’s understand what a floating rate is.

What is a floating rate home loan?

In Singapore, a floating rate refers to an interest rate that fluctuates throughout the tenure of the loan based on the prevailing market conditions and the benchmark rate the loan is pegged to.

With a floating rate home loan, the interest rates are tied to a benchmark (reference) rate that is pegged to the package and a bank spread or margin to form the total home loan rate.

The spread is an additional interest rate a bank or financial institution charges to cover administrative costs and profit margin. It is subject to change throughout the loan tenure, which may lead to changes in the benchmark interest rates.

With fluctuations in market conditions, the benchmark rate can rise or fall, which in turn can cause the floating rate to increase or decrease.

During favourable market conditions, the floating interest rate tends to stay low. Conversely, the floating rate tends to rise when market conditions are critical.

In 2024, when considering a floating rate home loan in Singapore, it’s crucial to dig deeper into both market forecasts and your personal financial landscape. The anticipated interest rate cuts suggest that loans tied to the SORA rate might be favourable as they can adapt to lower market rates. This change in your floating rate home loan could translate into reduced loan repayments, offering potential savings.

Now let’s look at the common benchmark rates found in floating rate home loan packages:

Rate typeDescription
Board rateA bank-managed rate, fully controlled and determined by bank. Changes are not transparent.
Fixed Deposit Home Rate (FHR)Pegged to the bank’s fixed deposit rate. Changes are somewhat transparent as it is monitored by the Monetary Authority of Singapore (MAS).
Singapore Interbank Offer Rate (SIBOR)The interest rate at which banks borrow from one another, set by a panel of banks. Closely tied to the US Fed Reserve rate movements. Changes are transparent (but less transparent than SORA). To be phased out by 2024.
Singapore Overnight Rate Average (SORA)SORA is the average rate based on the average of past borrowing transactions. The MAS website displays the SORA rates. Better visibility on interest rates.

All these floating home loan packages are more volatile than fixed rate home loans, as they are subject to revisions and market fluctuations. This suggests that floating interest rates are a good choice during a typical steady or declining market environment, like what is expected in 2024 and beyond. However, these rates can quickly rise when prices are rising in general.

Before we go into the details, we think it is important for our readers to know why floating interest rates in Singapore increased in the first place.

Why floating rates for home loans increased in 2023?

In March 2020, leading central banks across the world slashed interest rates to near zero to combat the detrimental effects of the COVID-19 crisis on the global economy. This is a common practice during a recession because lower interest rates help boost economic growth.

But as the global economies began to recover and normalise, the US Federal Reserve began its one of the most aggressive rate tightening campaign in the history.

The rise in floating rates for home loans in Singapore were due to various factors, including the rising benchmark lending rate by the US Federal Reserve and the high inflationary environment. The US Fed raised short-term interest rates (federal funds rate) 11 times since March 2022 to combat post-pandemic inflation.

In July 2023, the FOMC raised interest rates to 5.25%–5.50%, marking the 11th consecutive rate hike. The Fed’s benchmark interest rates were at their highest level in over 20 years.

Since most floating rate packages in Singapore are pegged to SORA or SIBOR, the rising federal funds rate greatly impacts Singapore’s mortgage rates.

Both SORA and SIBOR benchmarks measure the interest rates on the interbank markets and have historically shown somewhat similar trajectories. Note that SORA will replace SIBOR as the key interest rate benchmark as SIBOR is set to be discontinued after December 31, 2024.

Note that the 3-month compounded SORA has increased from 0.1949% at the beginning of 2022 to 3.62% in March 2024.

Additionally, the rising inflation rate caused interest rates to rise. As red-hot inflation continued to increase for the most part of 2023, so does the price of everything, including mortgage rates, thus affecting your SIBOR or SORA pegged mortgage packages.

Benefits of choosing a floating rate home loan

Despite the increase in floating interest rates, there are still some benefits of choosing a floating rate over a fixed rate to finance your home purchase.

More transparent

Information regarding floating rates like SORA can be sourced online from the ABS and MAS websites respectively, offering borrowers a transparent view of how interest rates are moving. SORA rate is updated regularly, often daily, reflecting real-time changes in the market and determined by market forces, not set by an individual bank.

Chance to make the most of falling interest rates

When there’s an expectation of falling interest rates, as anticipated in 2024, opting for a floating interest rate package can be financially advantageous. In such a scenario, borrowers with floating rate loans stand to benefit from reduced interest payments on their principal loan amount.

This means that, over time, there could be significant savings on the total interest paid, making it an opportune moment to capitalize on these anticipated rate cuts.

More flexibility for prepayments

In a declining interest rate environment like the one anticipated in 2024, floating rate home loans offer the added advantage of flexibility for prepayments. This feature is particularly beneficial for property investors or homeowners who may want to make partial or full payments at any time without facing penalties.

As rates decrease, borrowers might find themselves in a better financial position to make extra payments, thus reducing their overall interest burden more effectively compared to a fixed-rate loan where prepayment can attract penalties. This flexibility can lead to significant long-term savings, especially in a market where interest rates are on a downward trajectory.

Cons of choosing a floating rate home loan

Floating rate home loans may not be very useful and practical for some homebuyers due to the following reasons:

A risk that interest rates may increase

When choosing floating interest rates, it may cause a fluctuation in your monthly instalments, resulting in higher interest payments. It could be a problem if you have limited financial resources or are already stretching your budget to afford the home loan.

Therefore, when considering a floating rate home loan in Singapore, it’s vital for potential borrowers to evaluate their financial resilience and risk tolerance. Are you prepared for a scenario where rates might unexpectedly rise? Can your budget accommodate such changes without strain?

Higher bank spread after 2-3 years

To gain a more significant profit, banks typically charge a higher spread on floating interest rate packages as the number of years increases. It would mean the borrower has to pay higher interest costs.

Unpredictability & volatility of floating rates

If you subscribe to a floating interest rate package, you can experience any fluctuation in interest rates as floating rates are subject to market conditions. In a rising interest rate environment, the volatility associated with floating rates makes it difficult to plan your finances and budget accordingly.

Therefore, for the risk-averse borrowers who are looking for stability and predictable repayments, a floating interest rate package might not be suitable.

Who should consider floating rate home loans?

Homebuyers and property investors who are comfortable with some degree of risk and are financially prepared to handle potential interest rate fluctuations should consider floating interest rates for a home loan to save money in the long run. These loans are particularly suitable for those who anticipate interest rates will decrease, as is expected in 2024.

Property owners who are also considering selling their property in the short term or would like to make lump sum repayments annually are better suited for floating rate home loans since they provide the flexibility for those scenarios without incurring hefty penalties. Additionally, individuals who plan to refinance in the near future may find floating rate loans more appealing.

If you closely monitor market trends and volatile market conditions don’t deter you, and you have plenty of wiggle room in your finances should the interest rates go up, then floating rates may be a good option.

Additional features to look for in floating rate home loan packages

Below we will discuss some features available in floating rate packages that may be helpful when managing your loan:

Look for a free conversion

Most fixed and floating rates home loan packages come with a free package conversion to entice and convince homeowners to keep their loans with their existing banks.

However, some floating rate packages offer free conversion anytime during the lock-in period or in case the bank raises the mortgage base rate. It helps homeowners to switch to a more suitable package that may come up within the free conversion offers.

Go for a shorter or no lock-in period

If you have plans to sell your property in the near future, pay down on your loan, or restructure the loan or the ownership of the property, a shorter lock-in period can work well for you. A shorter or no lock-in period offers homeowners more flexibility to decide what they would like to do for their home loan and property after the expiry of that period.

Therefore, try to select a floating rate package offering a short lock-in period of only one year compared to a minimum of 2- or 3-year lock-in period required for fixed rate packages.

Interest offset accounts

Certain floating rate packages will allow a portion of your cash deposits to earn the same interest rate as your floating rate package. They allow you to reduce your interest expense for your housing loan, and you pay off your principal balance faster.

Such interest offset mortgage accounts are suited for business owners or investors with some cash or deposits to be deployed or used in future but currently sitting in low-interest savings or current accounts.

Should you pick a floating rate home loan in 2024?

With the current economic uncertainty, many homeowners are feeling confused and stuck as they are finding it hard to decide whether they should choose a fixed rate loan to lock in stability and predictable mortgage repayments or pick a floating rate loan package, since mortgage rates have increased significantly in the last two years and would plateau in 2024 (based on the Fed’s mortgage rate predictions).

Choosing a floating rate home loan in 2024 hinges on the expected interest rate environment and your personal financial situation. With interest rates predicted to decline, a floating rate loan, typically linked to the SORA, could offer savings through lower interest costs.

While floating rates have the potential to save you money in the long run, they also expose you to the risk of higher monthly payments in case interest rates rise.

Fixed vs floating rate home loans: Key differences

CriteriaFixed rateFloating rate
Interest rateThe interest rate remains unchanged throughout the lock-in period, ranging from 1 to 3 years.The interest rate may rise or fall based on market conditions and varies throughout the life of the loan
StabilityBorrowers enjoy certainty and predictabilityBorrowers are exposed to interest rate fluctuations, causing uncertainty in monthly payments
RiskInterest rates generally increase abruptly after the lock-in period; protected from fluctuations during the lock-in periodBorrowers face the risk of higher rates in a rising interest rate environment
Prepayment penaltyMay come with early full- or partial- prepayment penaltiesDo not typically have prepayment penalties; allows repaying your loan anytime
Suitable forThose with low-risk appetites and value stabilityThose who seek opportunities to save

Whether to choose a fixed or floating home loan should depend on your circumstances. For example, ask yourself what matters more – is it the certainty of monthly payments or maximising savings in the longer term?

If you want to know how much you would be paying each month so that you can plan and manage your finances accordingly – without any surprises, then a fixed rate loan might be a more suitable option for you. However, it is better to pick a shorter lock-in period for a fixed rate home loan as interest rates could fall in the next one or two years, and you might want to save money by refinancing.

As a borrower, if you think the interest rates have gone up substantially and they now have little runway to go any higher due to recessionary pressure, then it would make sense to go with a floating rate home loan package. However, to be safe, you might want to set aside some extra cash should interest rates rise contrary to your belief.

But is there a way to enjoy the best of both worlds? The answer is a YES!

If you prefer the certainty and stability of a fixed rate bank loan but don’t want to miss out on the chance to enjoy lower floating rates in case the market rates decline, you might want to consider the 2-in-1 home loan package from DBS.

Under this approach, you can park a portion of your home loan under the fixed interest rate for your peace of mind, while the remaining loan amount can go under the floating rate home loan package.

Before committing to any home loan package – fixed, floating or hybrid – make sure you check the relevant fees (valuation fees, legal fees, etc.) and other terms and conditions related to refinancing or repricing. Please note that you can’t refinance your home loan during the lock-in period without incurring penalty fees.

Ultimately, it boils down to whether you are looking for stability or the potential for lower interest rates. The decision whether or not you should choose a floating rate for your home loan in Singapore depends on your individual financial situation and risk appetite.

While a floating rate loan in 2024 has the potential for cost savings, it’s a decision that should be made after careful consideration of your financial situation and market dynamics.

Final Thoughts

When looking to buy a house or refinance your home loan package, you must keep an eye on the prevailing market conditions and availability of different floating rate packages. When you are prepared for any potential changes in floating interest rates, you can seek professional advice to help you decide which floating home loan package to choose.

If you feel it is time-consuming and stressful to monitor the interest rate movements regularly, please don’t hesitate to get in touch with one of our mortgage consultants at Dollarback Mortgage.

Our professional mortgage consultants will help you understand the broader economic factors at play, including inflation trends, global economic policies, and how they specifically impact Singapore’s market rates. They can also guide you in aligning your choice with your financial goals and risk profile.

Get the best home loan in Singapore across all major banks and compare mortgage rates with the highest rewards.

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