Choosing Between a Fixed and Floating Housing Loan Interest Rate


When it’s time to get to own your own home, the first thing you’ll need to tackle is the topic of financing. Essentially – how are you going to go about actually getting your home paid for? What financial options are open to you and your family or partner, and what kind of homes are available to you?

If you don’t want to rent a house forever and want a property you can truly call your own, that involves getting a housing loan for most people. Finding properties in your neighborhood and online is easy, through directories like PropertyGuru Singapore – but talking to your mortgage agent about a housing loan or walking into your Singaporean bank and asking for a loan is a bit more of an involved process.

To begin with, one of the first concrete decisions you will have to make when taking out a loan for your dream house is the nature of the loans repayment terms. Banks in Singapore typically offer you two choices when it comes to refinancing your home – a fixed interest rate, and a floating interest rate. One way or the other, interest rates are there for the bank to make a profit off of the risk of you asking for one of its properties – but the two options do present you with a unique opportunity to save some money. Or potentially lose it.

 
 

Fixed Housing Loan Interest Rate

Let’s start with the fixed rate. A fixed rate essentially means that, no matter what the market’s interest rates dictate, you’ll be continuously paying the same percentage interest rate throughout an agreed-upon period of the loan. This is great when you started a loan during a period of low interest rates, just before prices begin to hike and the demand for vacant houses increases.

However, when faced with a continuously dropping market interest rate, a fixed rate can translate into a missed opportunity to save some money.

 
 

Market prediction is rarely a game anybody wins. However, statistics is a game wherein most people usually win. Over the long term – meaning, in loans with extremely long maturity periods – a fixed rate has a higher chance of saving you money because you avoid the possible negative fluctuations of the market. But vice versa remains true – if it’s a short loan and the market is currently favorable, chances are that a fixed interest rate is not the way to go.

Another factor is that a fixed interest rate also locks a borrower into the bank and loan they’re paying off. Meaning, if you cannot pay your mortgage in the future, or are in a favorable financial position and would like to refinance your loan to take advantage of that, you’ll have to face serious penalties for both refinancing and making prepayments on your loan.

Furthermore, many fixed rate packages only support a fixed rate for the first year to five years. Past that, all loans take on a floating interest rate – although the exact specifics, duration, and other details depend on your bank and the loan packages that it provides. If you do get a fixed loan for longer, the Financial Express points out that it’s best to stick to the short fixed rate period – especially in loans ending within a decade.

Floating Housing Loan Interest Rate

That brings us to the floating housing loan interest rate. While fixed interest rates don’t change, floating interest rates fluctuate based on several factors. Most notably, they change based on the market. When the market is favorable for buyers – that is, when the number of vacant homes in the housing market exceeds the demand for homes at the moment – home loan interest rates are down.

During rates with short amortization periods and quick maturity, a floating home loan interest rate pursued before the cusp of a market low is a great way to save money. But alternatively, long loans increase the chances of market fluctuations – including negative market fluctuations, and thus unpredictable changes in your home loan’s interest rates.

Floating rates aren’t based simply on the market, however. Instead, a floating rate is based on the SIBOR, or the Singapore Interbank Offered Rate. That, in turn, is based on the collective interest rates at which banks in Asia – and predominantly in Singapore – offer funds in the interbank market.

The interbank market, or the money market, allows banks to transfer funds from one bank to another in the region under an agreed-upon interest rate, with various periods for each loan, referred to as a tenure. SIBOR’s tenures last a month, three months, six months and maximally a year.

Typically, floating housing loans are pegged on a month or three month SIBOR tenure according to MoneySmart. When the money markets are favorable, and lending is frequent, interest rates go up – conversely, they go down if no one is lending money.

Which Interest Rate Scheme is Better?

Like with most financial questions, it depends. The premise and factors of the question are all quite simple and easy to understand, but identifying the right decision in your own context is the crucial key to making the right call.

Fixed rates are better when interest rates are low, and threatening to rise again. They’re also better when you want to avoid unnecessary risk, and consider the possibility of that risk fulfilling itself more daunting than the chance to save money.

Floating rates are better when rates are high and ready to fall again, and they’re an especially viable option if you have experience navigating the housing market. They’re especially viable when you’re already doing quite well and don’t have to worry about your current financial equity.

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