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. For those that come with lock in periods, it is best to complete the contract lock in before considering refinancing as you will incur penalties of up to 1.5% of the outstanding loan amount.
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 have a firm understanding of how the home loans market works and are willing to monitor the SIBOR or SOR indexes occasionally. You will need to spot an uptrend early should it happen.
Why Can’t You Just Refinance Floating Rates Every Time Rates Go Up?
It’s logical to select a floating rate with no lock in period, 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.
This is due to the fact that even if you were to find another interest package that is lower than what you have or free of the SIBOR or SOR element, refinancing to that new bank may not come with legal subsidies for the conveyancing fees. This means footing out cash to change bank, which you have to break even on before you even save any money on a lower rate.
At the start of your loan, the bank may have offered you a legal subsidy to pay for lawyers fees (this is not allowed anymore with MAS regulations as at 2013), and you have to pay back this amount if you leave the bank before the end of the clawback period (usually 3 years).
Also, consider this. If interest rates started to go up, then all bank interest rate packages will go up across the board. So the chances of you switching to another bank with lower rates becomes much harder.
Remember, you can never totally escape the SIBOR or SOR index when purchasing property, its always going to be a factor no matter what. Speak to MoneySmart.sg should you need more advice on this.