A "low interest" loan shouldn't mean you have very little interest in paying it back!

    How to decide between a fixed and floating interest rate housing loan?

    When you apply for a home loan in Singapore, you can either go for a fixed rate home loan or a floating rate home loan. As an applicant, making this choice will be quite a tedious task if you are unaware of how each of these loan types work. Let’s do a quick comparison between a fixed rate package and floating rate package.

    How does a fixed rate housing loan work?

    For a specific period of time, your rate of interest will be fixed. The term for your fixed home loan can range from 1 to 5 years. During this lock-in period, your rate of interest will not change irrespective of market conditions. In case you want to refinance your housing loan in between the lock-in period, you will face heavy penalties.

    How does a floating rate mortgage loan function?

    Your rate of interest will change on a daily basis depending on how the Singapore Interbank Offered Rate (SIBOR) or Singapore Swap Offer Rate (SOR) rates vary. You can opt for a floating rate package with or without a lock-in period.

    When to opt for a fixed rate home loan?

    A few scenarios mentioned below are favourable when you want to opt for a fixed rate loan:

    • When you value financial stability and want to manage your finances effectively by knowing your monthly expenses in advance.
    • When you are considering to repay your loan amount in cash.
    • When you feel there is a probability of interest rates going high.

    When to opt for a floating rate home loan?

    Choosing floating rate package is favourable during scenarios such as:

    • When you intend to repay your loan amount through the Central Provident Fund (CPF) or via periodic partial repayments.
    • When you have a clear understanding of how the home loans market in Singapore functions.
    • When you are ready to supervise the SIBOR and SOR indexes at regular intervals.
    • When you feel the interest rates are going to come down drastically.

    Cons of choosing a fixed rate package

    • You cannot refinance or switch packages during the lock-in period. Doing so will incur a penalty.
    • Even if the interest rates dip, you cannot take advantage of it.

    Drawback of floating rate package

    • Interest rates can change at any given point in time. You cannot predict how the interest rates vary.

    Our conclusion

    It is always better to do your research on interest rates before you finalise on a housing loan. When interest rates are at its peak, it is better you go for a fixed rate housing loan. When the rates are declining, you can opt for a floating rate mortgage loan.

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