Fixed rate home loans are consistent alright. People take them, and then consistently suffer. And this week, the already pricey fixed rates have gotten even higher. It leaves home buyers in a tight spot: Pick consistent rates that are too high, or pick fluctuating rates and court financial meltdown? The answer is somewhere in between:
What are Fixed and Floating Rates?
We have a whole article on this, but here’s a quick rundown:
Fixed Rate Home Loan – The interest rate on the home loan is fixed from the time of application. The duration of a fixed rate package ranges between three to five years, after which it reverts to a floating rate.
So if you take a fixed rate of 1.9% for three years, you are guaranteed to pay only 1.9% interest, regardless of fluctuations in the Singapore Interbank Offered Rate (SIBOR) or Swap Offer Rate (SOR). For the next three years, that is.
In general, fixed rate packages are more expensive than floating rate packages. And as of Monday (29th July 2013), they saw further hikes of between 0.1% to 0.2%.
Floating Rate Home Loan – The interest rate on the home loan is constantly adjusted, to match prevailing SIBOR or SOR rate. The rates are usually adjusted on a monthly or quarterly basis.
Although floating rates are cheaper, but there is still a significant group of people who choose fixed rates, with about 60% of Housing Board buyers preferring fixed rates. The reason’s more psychological than anything; borrowers like predictable repayment amounts.
So under the current circumstances, is it still worth picking a fixed rate package? It depends on three things:
- The Loan Quantum
- Your Financial Position
- Whether You’re a Home Owner or an Investor
1. The Loan Quantum
While fixed rates are usually more expensive, small loan quantums (the amount borrowed to buy the house) can still make them worthwhile.
If your loan quantum is under $1 million, for example, a bump of around 0.1% to 0.2% is a difference of around a hundred dollars a month. The slight difference could be worth the peace of mind knowing that you won’t be subject to fluctuations over the next 3-5 years. It’s when your loan quantum is huge, like over $2 million, that fixed rates start to make an impact.
2. Your Financial Position
If you’re already over-leveraged, it might be worth getting a fixed rate package. This will lock in the currently low interest rates, which are likely to rise, a move advised by industry experts such as Piyush Gupta, CEO of DBS.
And by likely, I mean “as the sun will rise” kind of likely. The Americans are slowing down their Quantitative Easing (QE), which is almost guaranteed to raise interest rates in the coming years.
Also, home loan rates have been at rock bottom for the past decade. Since an interest rate chart only allows movement in two directions, guess where it’ll go when “down” stops being an option.
So if you’re already stretched, it’s best to part with a few hundred dollars more a month than to deal with potential thousand dollar increases. Follow us on Facebook as we track these changes and provide updates on the interest rate situation.
3. Whether You’re a Home Owner or an Investor
Although he uses floating rate packages, businessman and long time property investor Anthony Kang says:
“I feel that for home owners, fixed rates are more appropriate in this low interest environment. For investors, if the interest suddenly rises, we have the option of selling the property before it becomes a liability. But a home owner needs a place to stay. So it is better for them to lock in low rates while they can get them.”
Then again, a home owner’s situation can be more complex than that.
If you’re a home owner, but want high gains because you’re looking to upgrade one day, floating rates may still be a better choice. You can get more personal advice from mortgage specialists, at sites like MoneySmart.
Have an opinion on whether fixed or floating rates are better? We want to hear you!
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