Picking the right home loan package isn’t just about finding the best interest rate – it’s also about choosing whether you want the rate to be either fixed or floating. So which is the better option? That depends on what kind of borrower you are.
What Is a Fixed Rate Package?
Fixed rate packages maintain the same interest rate over a given length of time ranging from 1 – 5 years. This means that your loan package has a locked-in rate that won’t change regardless of market conditions. Once the lock-in period lapses, the fixed rate will become a floating rate.
But be aware that choosing a fixed rate package means you’re also “locked-in” to the bank you’re borrowing from. So if you choose to refinance before the fixed rate lock-in period ends, you’ll have to pay hefty partial/full prepayment penalties ranging from 0.75% – 1.5%
Choose a Fixed Interest Rate If…
If you’re a borrower who values stability, better financial management, and are willing to pay a little extra for those benefits, choose a fixed interest rate package.
Fixed rates are favorable in the following circumstances:
- Interest rates are on the rise
- You’re paying your monthly repayments in cash
- You want to have financial certainty on how much you’re paying
What Is a Floating Rate Package?
Floating rate packages have interest rates that fluctuate on a daily bases according to rise and fall of SIBOR and SOR rates. These packages charge lower interest at the outset, with SIBOR and SOR movements determining how high or low the rate will be.
Floating rate packages can come with and without lock-in periods.
Choose a Floating Interest Rate If…
If you’re a borrower who is financially secure enough to weather market volatility in hopes of making lower monthly repayments, choose a floating interest rate.
Floating rates are favorable in the following circumstances:
- Interest rates are set to fall
- You’re making loan repayments through your CPF
- You’re making regular partial prepayments
- You have a firm understanding of how the home loans market works
Why Can’t You Just Refinance Floating Rates Every Time Rates Go Up?
It’s logical to select a floating rate and assume that you can refinance every few months with a cheaper loan package every time interest rates rise. But the reality is that you’ll end up spending more money as a result.
That’s because you can only refinance your bank loan every 3 years without fear of paying bank penalties. If you refinance before the 3-year period, you’ll end up breaking the bank’s “clawback” period (most home loans have this feature).
This means you’ll need to repay thousands in subsidies you received from your bank such as legal fees, valuation fees, and fire insurance. In addition, MAS also restricted the banks from offering legal subsidies for refinance/purchase. Now when you do either, you’ll have to pay full legal fees.
A Fixed/Floating Interest Rate Scenario to Consider Before Choosing
Let’s say you’re deciding on whether to choose a 3-year floating rate package that’s 1.2% or a 5-year fixed rate package that’s 1.5%.
You choose the 1.2% floating interest rate because it’s lower.
During the 3rd year of your home loan package, your floating rate rises to 1.9% and you decide to refinance to a lower rate of 1.7%.
But if you had chosen the 5-year fixed rate package that was 1.5 percent, you would still have 2 more years to pay the lower rate.
Each home loan package has its pros and cons, so consider this example and your financial situation before making your choice.
