Should I Choose a Fixed Or Float Rate Package for My Home Loan?
Out of 10 home owners, 9 will surely tell you that they have taken up a home loan to pay for their house. This should not be a surprise as a huge percentage of us are just a normal salaryman without the ability to make $100,000’s appear out of nowhere. There are 2 types of interest rates for home loans – fixed rates and floating rates.
Fixed rate home loans
Fixed rate home loan packages offer a fixed interest rate, typically for 2 to 5 years. This will give the borrower a sense of stability as the amount to pay per month is fixed. Another plus point for taking up a fixed rate home loan is that it will allow you to better plan your finances as you will know how much to pay for the loan, unlike floating rate home loan. With a better knowledge of how much to pay, you will be able to better budget your expenditures.
Despite the benefits of having a stable interest rate and ability to control your finances, fixed rate loans tend to have a higher initial interest rate compared to floating rate loans. However, the market might turn into your favour when interest rates start to climb; thus, making it beneficial for you since your interest rate has been fixed at a lower one.
Floating rate home loans
On the other hand, a floating rate loan is largely dependent on the market’s condition, therefore making it very susceptible to changes. For most floating rates, it is pegged to Singapore Interbank Offered Rate (SIBOR). There are two types of SIBOR pegged rates – 1M SIBOR and 3M SIBOR.
Floating rate home loans would be the most suitable in a falling interest rate market. Interest rates will be refreshed every 1 or 3 months for SIBOR-pegged rates; thus, in a falling interest rate market, this will mean that the interest rate paid will also decrease if the market is not doing well.
This type of home loan is less predictable as it is closely linked to the market conditions. Unlike fixed rate home loan, this will make it hard for you to budget your monthly expenses. If you are planning to take up floating rate home loan, be prepared for the interest rate to increase.
With that said, this article can be summarised into:
Fixed rate home loan will be suitable when the interest rate is expected to rise, interest rate is relatively low and you are comfortable with it, or you want to be able to plan your finances for the long term.
Floating rate home loan is more volatile and will make it harder for you to plan your finances. This type of home loan is usually taken up when the interest rate is anticipated to drop.
Regardless of the type of home loan you have taken up, it is possible to switch to the other type during your tenure period, by paying a small fee.