Buying a property is a huge milestone and one of the biggest financial commitments. It also entails a series of important decisions, such as choosing the right home loan package. In Singapore, there are two major types of home loans – fixed rate loans and floating rate home loans.
A fixed home loan rate is predictable and will not change for a specific period. A floating rate home loan, on the other hand, fluctuates according to market forces but allows borrowers to potentially take advantage of the low-interest rate environment.
So which one is the better option? That will depend on your personal circumstance and your preferences. Remember, home loan packages are not one-size-fits-all. Read on to learn more about fixed and floating home loans.
What Is The Difference Between Fixed and Floating Loans?
Fixed Home Loan Rate
Fixed rate packages offer a flat interest rate for a certain period, typically one to three years. This rate is locked in and will not change regardless of market conditions. That said, it is stable yet slightly higher compared to a floating home loan rate package.
Once the lock-in period lapses, the fixed rate will turn into a floating rate. The interest rate will be pegged to the SIBOR, SORA, FDR, or other reference rates determined by the bank.
Floating Home Loan Rate
Floating rate home loan packages have interest rates that fluctuate daily. It will depend on the rise and fall of the Singapore Interbank Offered Rate (SIBOR) and Singapore Overnight Rate Average (SORA), resulting in periodic adjustments. When the interest rate changes, your monthly installment amount will also change.
These packages typically charge lower interest at the outset since the rates are determined by SIBOR and SORA movements. Lastly, floating rate home loan packages can come with or without lock-in periods.
If you’re getting a package that comes with a lock-in period, it’s best to complete the contract lock-in before you consider refinancing to avoid incurring penalties of up to 1.5% of the outstanding loan amount.
Which Home Loan Package Is Better – Fixed or Floating Rate?
Fixed rate home loans are slightly higher yet more stable and have consistent monthly payments. Floating rate home loans have their interest rate pegged to the SIBOR and could benefit you in terms of paying less interest. However, you might also risk paying more when interest rates skyrocket.
Fixed Home Rate Loan: Best for Homebuyers Who Want Consistent Monthly Repayments
Opting for fixed rate loans gives you a sense of certainty since you know how much you’re going to pay monthly. This means you can create a consistent budget and plan your finances.
Although fixed rate loans have slightly higher interest rates than floating rate loans, if the difference is minimal, then you may want to consider your personal circumstances and needs.
Choose fixed home rate loans if:
- Interest rates are on the rise and would like to lock in your home loan at the existing rate.
- Interest rates recently dipped and you are comfortable with the current level.
- You are paying your monthly repayments in cash
- You want consistent monthly repayments for easier budgeting
Note that fixed interest home loans will revert to floating interest home loans after the lock-in period. If you want to keep enjoying the fixed rates, you can consider refinancing the loan.
Floating Rate Home Loan: Best For Homebuyers Looking For Opportunities To Save
Floating rate loans are linked to the bank’s benchmark rate, which will fluctuate along with market conditions. If there is a change in the benchmark rate, the interest rate on the loan will also change.
In Singapore, floating rate packages can be either a SIBOR-based loan, a SORA-based loan, or a Fixed Deposit Based Rate (FDR) loan.
For instance, some banks, such as DBS, offer floating rate loan packages pegged to FDR. The FDR benchmarks reference the prevailing Singapore Dollar fixed deposit interest rate for amounts S$1,000 to S$9,000 or such other sum the bank may specify. This option is less volatile compared to SIBOR or SORA. However, the interest rates are still subject to change at the lender’s discretion.
Choose floating home rate loans if:
- You are financially secure enough to face the rise and fall of the market in hopes of making lower monthly repayments
- Interest rates are expected to fall over time.
- You want to enjoy savings on your interest cost in the near-term because floating interest rates are set marginally lower than fixed rate loans. This helps you save on loan costs.
- You understand how the home loans market works and know how to monitor the SIBOR or SORA indexes.
How To Choose Between the Two?
One of the key deciding factors in choosing a home loan is Interest rates. Both fixed and floating interest rates have benefits and risks. Your choice must be based on what option offers you the best financial convenience.
- Do you prefer a consistent monthly repayment? You may benefit from a fixed interest rate package. With this option, you will also be protected from drastic interest rate hikes. However, be prepared to stick to your chosen home loan package as you may incur hefty charges, such as cancellation fees and prepayment penalties.
- Do you want to save every possible dollar? A floating rate home loan tends to be cheaper compared to fixed interest rate packages. This means you’ll be paying a lower monthly installment. However, you need to save up funds in case the interest rates increase.
- Which home loan package fits your income? Choose the loan type that best fits your income. For instance, a floating interest rate might be cheaper than a fixed interest rate, but it might be difficult for you to plan your budget ahead.
- Are the interest rates at an all-time low? If the interest rates are at a historical low, the only way for rates to move from here will be up or sideways. In short, it’s best to choose a fixed rate home loan if the interest rates are at a historical low in Singapore.
- Is the gap between fixed and floating rates too small? Say for example the current floating rates are pegged to the new interest benchmark of 3-month compounded SORA that range between 0.80% and 1% for the first two years. On the other hand, a 2-year fixed rate is at 1.05% to 1.20%. That said, the gap between fixed and floating rates is close to 0.10%.
If the gap is too small, it’s better to lock-in on a fixed rate home loan as a hedge against possible interest rate hikes without much opportunity costs.
Alternative Options If You Still Can’t Decide
1. Opt for a Combination of the Two Types of Rates
Choose a home loan that is partly fixed and part floating interest rate. This is a good alternative if you have other current loan payments and your cash flow has been reserved for your loan obligations. During this period, you can opt for a fixed rate. After that period, you can opt for a floating interest home loan.
2. Choose to Shift from Fixed Rates to Floating Rates or Vice-Versa
It makes sense to lock down on a fixed rate if the interest rate is at its lowest. However, you may want to shift to floating interest in the future. Ask your bank or lender if you can convert your fixed rate loan into a floating rate loan anytime during the loan tenure. Note that you may incur additional charges for this conversion.
FAQ
1. What Is a Lock-In Period?
This is the period during which you are contractually obliged to stay with the lender. This means you are not allowed to make partial/full prepayment of your home loan. The lock-in period comes as a condition for receiving a particular fixed rate, discount, and other perks.
Refinancing your home loan is considered a full prepayment of your existing home loan. If you choose to refinance your home loan before the lock-in period ends, you may have to pay hefty prepayment penalties, typically 1.5% of your outstanding principal.
2. Is It Better To Have a Fixed or Variable Loan?
There is no one type of home loan that will suit all homebuyers’ preferences. That said, choosing between a fixed or variable loan will depend on your personal situation, preferences, and level of understanding of interest rate movements.
For instance, if you prefer to have consistent monthly installments, a fixed loan may be more beneficial. On the other hand, if you want to save a few dollars on loan costs, you may consider a floating rate home loan since it is usually cheaper than fixed rate loans. But you’ll need to save funds in case the interest rates increase.
3. Which is Better – SORA or SIBOR?
These are industry-wide benchmark interest rates used to determine the different types of home loans in the market. SORA rates are considered backward-looking overnight rates based on transaction data and are published at 9am daily.
SIBOR rates, on the other hand, are forward-looking term rates and are based on estimates from Singapore banks. This means it is subject to higher market volatility.
SORA offers more stability and transparency.
Conclusion
The right home loan will depend on your personal situation and your needs. As such, you need to consider different factors to select the best option that suits your financial capacity. Note that you also have the option to change how interest is charged on your home loan, especially after the lock-in period.
Key takeaways
- Fixed rate packages offer a flat interest rate for a certain period, typically one to three years.
- Floating rate home loan packages have interest rates that fluctuate daily.
- Floating rates depend on the rise and fall of the Singapore Interbank Offered Rate (SIBOR) and Singapore Overnight Rate Average (SORA), resulting in periodic adjustments.
- Fixed rate loans give you a sense of certainty since you know how much you’re going to pay monthly.
- A floating rate home loan tends to be cheaper compared to fixed interest rate packages.
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