Fixed or Floating Home Loan: Which is Better?

  • March 01, 2023
  • A fixed rate loan allows the borrower to “lock-in” the interest rate in a rising rate environment.

    A floating rate mortgage varies based on the reference rate and the borrower must be prepared for any changes.

    It comes down to prioritizing certainty or the potential for lower interest rates.


    Fixed vs Floating Rate Home Loans – Differences

    A fixed rate home loan comes with a locked-in interest rate, while a floating rate loan varies throughout the loan tenure based on the reference rate. Fixed rates offer more certainty, but tend to be higher, while floating rates are cheaper but offer less certainty.

    In Singapore, floating rate home loans are usually pegged to the Singapore Overnight Rate Average (SORA) or Fixed Deposit Based Rate (FDR). The 3-month compounded SORA has risen from 0.1949% at the start of 2022 to 3.0074% as of January 11, 2023.

    Banks like DBS offer a hybrid home loan option which offers a mix of fixed and floating rates for the best of both worlds.


    Choosing Between a Fixed and Floating Rate Mortgage

    With the current economic uncertainty, choosing between a fixed or floating rate mortgage can be a challenge. Consider your priorities for certainty or the potential for lower interest rates.

    A fixed rate loan may be more suitable if the certainty of knowing your monthly payment is important to you, but consider a shorter locked-in period in case interest rates fall.

    A floating rate loan may be more suitable if you believe interest rates have peaked or if recessionary pressure is building up, but consider setting aside extra cash in case rates rise.

    See also
    You cant Afford to Wait into Market

    Before committing to a home loan, consider the relevant fees and conditions for refinancing or repricing. Home loan packages usually have a lock-in period of at least 2 years with penalties for refinancing or paying down the loan during this time.


    Tips for Cushioning the Impact of Higher Mortgage Repayments:

    Review your current home loan and explore options for potential interest savings.

    Consider the total cost of the package, including fees for refinancing or repricing.


    “Maximizing Savings on Home Loans: 6 Tips for Homeowners and New Borrowers”

    Homeownership is a big financial commitment that requires careful planning and management of finances. As interest rates change over time, it’s crucial for homeowners to re-evaluate the terms of their home loans regularly to ensure they are getting the best deal. For those who are considering buying a home, it’s crucial to have a realistic view of the financial requirements involved. Here are six tips to help homeowners and new borrowers save on home loan interest:

    1. Re-assess the interest rate: Homeowners should evaluate the interest rate of their existing home loans and explore other loan options that offer potential interest savings. The DBS Home Loan Savings Calculator can be used to calculate the potential savings by repricing with their existing bank or refinancing with another bank.
    2. Reduce the housing loan amount: Homeowners who have extra funds available can consider partial repayments of their home loan to reduce the interest payments. Note that some banks may charge fees for partial repayments, so weigh the pros and cons before making a decision
    3. Use CPF funds: Homeowners can use the funds in their CPF-OA account to service their monthly mortgage repayments, even for private properties. This can be done by submitting an online form via the CPF website. However, using CPF funds to repay the mortgage will reduce the interest earned on the CPF-OA account.
    4. Extend the loan tenure: Homeowners can consider extending the tenure of their home loan to lower the monthly repayments, but it will result in paying more interest in the long run. The loan tenure can be extended up to 30 years for HDB flats and 35 years for private properties.
    5. Set aside a buffer: For those on a floating rate loan, putting aside more money each month into the home loan servicing account can be a good idea. This will help prepare for possible higher instalments and create a financial buffer.
    6. Choose an affordable home: New borrowers should right-size their property purchase and determine how much they can afford to borrow based on their monthly income and other debts. The Total Debt Servicing Ratio (TDSR) caps total monthly debt repayments at 55% of gross monthly income. Consider other related payments, such as property taxes, condo maintenance fees, insurance, home repairs, and interest on the property loan. Have a long-term view and set aside emergency funds for unforeseen circumstances.
    See also
    Navigating the HDB Resale Market: Insights for Sellers and Buyers

    In conclusion, maximizing savings on home loans requires careful planning, evaluation, and management of finances. It’s essential to stay attuned to the latest trends and developments in the market, factor in all costs, and have a long-term view of the financial commitments involved in homeownership.


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