Should I take a fixed or floating rate package for my home loan in Singapore?


At some point in our lives when we purchase a house, we’ll eventually need to take up a home loan in Singapore. Choosing the right home loan package in Singapore is important as you’ll be servicing the loan for the next few decades of your life.


The two most popular types of interest rates in Singapore for home loan packages are the following: fixed interest rates and floating interest rates. The interest charged is what the bank earns from lending you a loan to pay for your house in Singapore.


How do fixed rate packages work?

In fixed rate packages, the interest rate that you pay for your home loan will remain unchanged for a specific period of time—typically one to three years. This is a good option to consider during low interest rate environments.


However, individuals will be penalised with hefty partial or full prepayment penalties ranging if they choose to refinance before the lock-in period ends.


There are no perpetual fixed rate packages in Singapore. Once the lock-in period ends, your home loan will be reverted to floating rates.


The closest fixed rates that individuals can get are the following:

HDB Concessionary Loan: The HDB loan’s interest rate is pegged to 0.1% above the prevailing CPF Ordinary Account (OA) interest rate. While it is not a fixed rate, it has been constant at 2.6% interest for over the past two decades. However, there are some criteria to fulfil when applying for the HDB loan. To compare whether to take a bank loan or HDB loan, read our analysis here.


Semi-fixed home loan rates: An individual needs to constantly re-finance from one fixed rate package to another which may incur additional costs such as legal fees.

Special mortgage: Foreign and private banks do offer perpetual fixed rates but this is not available to most Singaporeans.


Pros of fixed rate packages


1. Remains constant: This gives borrowers a greater peace of mind, especially during volatile periods or in high interest rate environments. Borrowers will not face any unexpected interest rate hikes and don’t have to fork out more for their monthly home loan repayments. If you’re taking up a loan during a low-interest rate environment, you can even secure a low rate before the interest rates climb back up once the economy recovers.


2. Easy to understand: Unlike floating interest rates, it is less complicated to calculate your home loan repayment amount with a fixed home loan package. You can also make use of our mortgage calculator to easily find out about the principal amount and total interest amount that needs to be paid.


3. Helps you manage your finances better: With a fixed rate, individuals can plan their expenses better. They can predict more accurately and have greater control over their monthly cash outflow.


Cons of fixed rate packages


1. Costlier: Fixed home loan packages will cost more than floating home loan packages as the bank is guarding itself against potential interest rate hikes in future. Also, if you happen to take up a fixed home loan during a period of high interest rates, you’ll be stuck with a costly loan for a few years.


2. Heavy penalties: If you don’t stick to your fixed home loan package and wish to refinance or prepay your loan early, be prepared to fork out money for hefty charges such as prepayment penalties and cancellation fees.


In summary, opt for fixed interest rates when Interest rates are rising;

You wish to have a peace of mind, especially during volatile or uncertain periods


How do floating rate packages work?


The interest rate that you pay for your home loan will fluctuate throughout the loan tenure due to market and economic variations. In Singapore, all floating interest rates will be pegged to SORA from end 2021 onwards.


SORA refers to Singapore Overnight Rate Average, the past average rate of all interbank lending transactions brokered in Singapore


Pros of floating rate packages


1. Cheaper: Floating home loan rates tend to be cheaper, which means that borrowers pay a lower instalment every month. This is beneficial to individuals looking to save every dollar and wanting to maximise profit. For example, in a $800k loan, a 1% floating-rate package would translate to a monthly repayment of $2,573 for the next 30 years, compared to a 1.5% fixed-rate package of $2,761. It is cheaper by $67,680 overall.


2. Can prepay the loan early: Borrowers who are on certain floating home loan packages are not tied down to their loan package. They can make lump sum repayments anytime without penalty. If interest rates are low, they can potentially pay off their loans faster by keeping the same repayment amount.


Cons of floating rate packages


1. Unpredictable: The interest rate charged will be different every month with a floating home loan rate. Majority of the time, there is little way to predict if it will rise or fall. Borrowers will have to bear the risks of interest rates rising. If interest rates skyrocket, it will potentially ratchet up debt servicing costs. This is especially detrimental to individuals without sufficient cash savings like freelancers and sole breadwinners


2. Harder to manage finances: Planning your finances can be harder without knowing the exact interest rate that will be charged to your loan. Some may even underestimate the amount needed to set aside to finance their loans or be unable to service their loans when interest rates increase. It is recommended to set aside some extra funds in case the home loan rates increase.


In summary, opt for floating interest rates when Interest rates are expected to fall

The cost-savings matters to you in the short-term. You have extra funds to tide through volatile periods.


Criteria to consider for fixed rate and floating rate

Both fixed and floating interest rates in Singapore have their pros and cons. Whether to choose fixed or floating depends on the individual and the following criteria.


1. Risk appetite: Borrowers who prefer stability and have a lower risk appetite may opt for a fixed home loan rate. They include older individuals who are close to, or have already, retired. On the other hand, borrowers who have a higher risk appetite can choose a floating home loan rate. They include younger individuals who have a longer repayment horizon or those who are financially secure to weather the market volatility.


2. Optimism usage of your dollar: If saving every dollar matters a lot to you, a floating home loan rate is the way to go. Nonetheless, some people may think that opting for fixed home loan rates is also worth the extra costs due to the security they offer during periods of uncertainty.


3. Income and expenses: Some individuals will have enough savings to tide them through interest rate hikes. Others may not be so lucky and don’t have enough funds on-hand to service their debts should interest rates rise. Choose the home loan package that best fits your income and expenses.


Which type of home loan in Singapore is the best: Floating or fixed home loans?

In summary, if the difference between floating and fixed interest rates is minimal, then you may want to assess your risk appetite, income and expenses, and if you wish to have optimum usage of every dollar.


Back to the example of the $800k loan with a 1% floating-rate package and 1.5% fixed-rate package. While the monthly repayment is cheaper by $67,680 overall, when you do the Math, it is only cheaper by $188 per month. Whether that $188 is worth a better sleep at night during periods of uncertainty or volatility is really dependent on the individual.


At the present situation where the economy is recovering, a fixed rate home loan in Singapore allows borrowers to protect themselves against the risk of rising rates. They can secure a low interest rate for a period of at least three years, which is extremely beneficial.

Selecting the right mortgage loan in Singapore doesn’t have to be hard.


At Mortgage Consultancy, we compare and offer you the best rates and packages of home loans across 16 banks in Singapore. Contact us today at +65 8556 5271 to get the most suitable bank loan according to your needs. Free consultation and application services provided.