Home loan packages are not one size fits all. How would you know which one will suit you best? Let us help you navigate through the jargon-heavy maze.
If shopping around for the best home loan is not your first rodeo, chances are you’ve seen the terms “floating rate” and “fixed rate” pop up a lot in your search.
This brings us to the ultimate home buyer’s dilemma: choosing between the predictable fixed home loan rate that never changes or taking advantage of the low interest rate environment and gunning for the floating home loan rate – one that fluctuates according to market forces but may potentially give you more savings if luck is on your side.
But of course, first things first, deciding between an HDB loan or a bank loan will be your priority if you're purchasing an HDB flat.
Let’s break down the two main types of loan rates and discuss for whom they are suitable for.
Fixed home loan rate
Literally the opposite of floating rate, fixed home loan interest rates remain unchanged throughout the lock-in period (which averages between 1 to 5 years).
At the time of writing in October 2021, you’ll be looking at rates that range from 1.23% to 1.80% per annum during the lock-in period.
Once the lock-in period ends, your home loan will be pegged to a board rate, FHR, or SIBOR, depending on the home loan package you signed up for.
While fixed loan rates tend to be higher than floating rates, borrowers are rewarded with a general peace of mind knowing that their loan repayments are impervious to interest rate hikes. Seeing as we live in a time of unprecedented economic uncertainty, this is a huge plus as the predictability aids in a more consistent budgeting plan.
Suitable for: Those with low-risk appetites and value stability
Fixed rate loan packages are great for homebuyers with low-risk appetites. Freelancers and sole breadwinners who require interest rate protection may also find this type of loan enticing so as not to lose out in monthly mortgage repayments. Bear in mind that there are hefty fees if you were to opt out or refinance within the lock-in period.
Floating home loan rate
|Singapore Interbank Offer Rate (SIBOR)||Interest rate at which banks borrow from one another, set by a panel of banks. Closely tied to the US Federal Reserve movements. Changes are highly transparent.|
|Board Rate||Entirely controlled and determined by the bank internally. Changes are not transparent.|
|Fixed Deposit Home Rate (FHR)||A type of board rate that is pegged by the bank’s own deposit rate. Changes are somewhat transparent as it is under the monitoring of the Monetary Authority of Singapore (MAS).|
|Singapore Overnight Rate Average (SORA)||SORA is the average rate based on past borrowing transactions. Changes are highly transparent. SORA rates can be checked via the MAS website.|
Your garden-variety floating home loan package can be pegged to Singapore Interbank Offer Rate (SIBOR), Board Rate or Fixed Deposit Home Rate (FHR). Compared to fixed rate home loans, this is the more volatile option as it is subject to revisions and market fluctuations.
While you can enjoy added savings if interest rates were to dip, you may also risk paying more when interest rates skyrocket. That being said, you won’t be experiencing whiplash from the rise and fall of interest rates should you decide to go for a floating package – banks will typically give a 30-day advanced notice when the rate changes, giving you time to find an exit (A.K.A. refinance) if it gets a little too steep for your liking.
Suitable for: Those who seek opportunities to save
Quicker to rise, quicker to fall. You can reap huge savings when interest rates plummet; but it might also increase resulting in higher monthly repayments. If volatile market conditions don’t deter you, or if you have an eye for spotting the right moment to strike when interest rates are showing signs of plummeting, then the floating rate package is perfect for you.
Borrowers under this category would typically be property investors who want to maximise profit, or those with plenty of wiggle room in their finances should the rate go up. Floating rate borrowers would also appreciate the flexibility to prepay the loan early as fixed rate counterparts don’t usually allow that luxury.
Read these next:
Best Home Loans In Singapore 2021
Refinancing vs Repricing Home Loan: What’s The Difference?
Home Loans: SIBOR Rate vs Fixed Deposit Home Rate (FHR) Loans
How to Minimise Your Home Loan Costs?
HDB Loan Vs Bank Loan: Which One Should You Go For?