Wednesday, February 20, 2013

How Do I Choose Between a Fixed and a Floating (Variable) Rate Home Loan?

The following is a guest post by Property Buyer

People are almost always caught up with the decision of which Singapore home loanis best for them - within themselves, there is always the constant debate of whether one is better than the other. Will choosing a mortgage type depend on the person’s intelligence, instinct, bookkeeping skills, or attitude on sound money management? How does a buyer’s situation affect his or her decision to use either a fixed or a floating home loan?

Fixed-rate mortgage

Mortgage packages offering a fixed home loan rate provide a specific constant rate for a certain period of the loan.

For example, if you are buying a house now with a fixed rate home loan at 2.3% per annum, then the 2.3% per annum would be the interest rate for the fixed period which could vary between 3 to 5 years, depending on your package and its terms.

After the fixed period ends, the interest will convert to a 1) variable loan package rate, or 2) rate pegged at a discount below the bank's board rate.

The following illustrates an example of the rate structure for a fixed rate package.

Bank Y Fixed-rate Loan
Interest Rate (p.a.)
First Year
Second Year
Third Year
Fourth Year Onwards
0.50 % below the Board Rate

During this fixed period, if there are changes in the interest rate environment to a lower rate, the borrower will have a higher opportunity cost as he may be able to enjoy lower loan rates with a variable rate loan instead.

Floating (variable) rate mortgage

The interest rate for this loan type is dependent on the base rate and the spread or margin being used by the bank or lender. Borrowers who are savvy about interest rate movements often choose the floating home loan rate to obtain cost savings, especially those who are financially secure and in total control of their wealth as they will be able to afford the higher interest payments shall rates suddenly soar.

Most of the floating (variable) rate mortgages use a interest rate that is benchmarked against SOR (Singapore Swap Offer Rate) or SIBOR (Singapore Inter-bank Offered Rate), which is the variable component of the interest rate.

The bank will add a spread or margin to SIBOR or SOR. Together, the two will form the interest rate. For instance, the rate could be 3-Month SIBOR + 1% , where the 1% is the spread.
The spread is usually adjusted upwards after the first few years of the loan. An example of an interest rate structure for a floating rate loan follows.

Bank X SIBOR Loan
Interest Rate (p.a.)
First Year
0.75% + 1-Month SIBOR
Second Year
0.75% + 1-Month SIBOR
Third Year
0.75% + 1-Month SIBOR
Fourth Year
1.00% + 1-Month SIBOR
1.25% + 1-Month SIBOR

What are the factors you should consider when deciding which loan type to use?

1. Understands market interest rate trend
Accuracy is very important in forecasting and tracking interest rate trend. If you are able to do so, you can derive significant interest payment savings from a floating (variable) rate loan during a low interest rate environment.

2. Financial and health uncertainties
If you are unsure about your financial capacity and health a few years from now, then the fixed home loan rate is best for you. You can lock in and secure the rate for the fixed duration.

3. Cash repayments
Paying your loan in cash every month with a fixed home loan rate makes financial planning easier. Use iCompareLoan home loan comparison system to learn the rates for the different loan packages to help you find the ideal mortgage package.

4. Tolerance for risk
Each type of home loan rate has its own benefits. The question is how far can you tolerate a higher rate?

Of course, no one will be sad to accept a lower rate, but, considering your financial capacity, can you afford  paying a higher rate for a certain period of time? If yes, you can consider a variable rate loan because with it you can have reduced interest payment when interest rates are low, but you will have to incur greater payment if rates climb.

Given the many factors you have to take into account when deciding between the two types of loans, you may prefer some professional help. Turn to the friendly and experienced mortgage brokers at www.iCompareLoan.comtoday.

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