Fri. Feb 23rd, 2024
Fixed or Floating home loan?Fixed or Floating home loan?

TL;DR – Before deciding which home loan suits you, read this to find out the difference between fixed and floating mortgages. 

Interest rates are expected to continue rising, so choosing the right mortgage for your financial needs is more important.

There is no right or wrong answer to this question. It isn’t just about comparing interest rate percentages rather; you should make the decision based on your personal circumstances.

What is a fixed rate home loan?

Fixed rate home loans in Singapore usually remain fixed for the duration of its lock-in period. The lock-in period is typically between two to five years, depending on the mortgage package you choose.

Once the lock-in period is over, interest rates for the fixed rate mortgage will switch to a floating interest rate, pegged to the Singapore Overnight Rate Average (SORA) or other reference rates established by the bank.

 Who is suitable for fixed rate home loans?

  • Homeowners with low-risk appetite in the short term. This option will offer some certainty in a volatile interest rate climate.
  • Homeowners who are prepared to put in the effort and expense to refinance their property after the lock-in period is over.
  • Landlords who want to keep mortgage repayments constant for ease of financing.

What is floating rate home loan?

Floating rate home loads mean interest rates of the loan are subject to periodic adjustments. The frequency of the adjustments depends on the type of floating rate you applied for.

The fluctuation in interest rates will affect your instalment amounts in tandem.

READ MORE:  So, we asked a sandwich-class S’porean the million-dollar question, “Is the Govt doing enough?”

The lock-in period for floating rate loans is typically two years. Floating rate home loans may have more relaxed rules on partial repayment during the lock-in period.

Who is suitable for floating rate home loan?

  • Homeowners who expect interest rates to trend down.
  • Homeowners who know how to take advantage of interest rate fluctuations to get a competitive mortgage package.

Will there come a day when I cannot pay my home loan?

When banks check on whether you qualify for certain loans, they’ve built in higher interest amounts to evaluate your ability to service the loan based on your current income. For example, if the interest at the beginning of the year is one per cent, banks would measure it as 3.5 per cent.

This serves as a stress test to ensure affordability so that you don’t end up sacrificing on basic survival expenses.

In cases where interest rates are skyrocketing, some sacrifices may need to be made like putting your shopping spree or vacation temporarily on hold but, generally, the mortgage would still be manageable.

Buffer for a rainy day

Adding a buffer to your mortgage savings will give you the flexibility to decide on your next mortgage move.

The buffer will also cushion the high-interest rate impact, so the pinch won’t be too painful. You can choose to delay refinancing to wait out the sudden spike in interest rates, or you can choose to pay off a lump sum to reduce your monthly interest repayment.

A good buffer is usually six to 12 months’ worth of monthly repayment. However, in view of the current situation of rising interest rates, setting 18 months would be better.

Cooling measures to keep public housing affordable

By Wesley

A Singaporean talking about anything related to Singapore and Singaporeans. Current affairs junkie!