Buying a new home in Singapore may be one of the happiest things to happen – it’s a mark of adulthood after living with our parents for two to three decades. However, the process is never easy. Ask any homeowners and they’ll tell you about the months of research, weekends spent home-viewing and of course, getting through all the paperwork and learning about laws, policies and restrictions that can impact your every decision.
Obviously, finally finding a place of your dreams is a big achievement. But the next step is even more important – getting the right home loan. With all the jargon and various types of home loans available, it can get pretty mind-boggling. This is where a mortgage broker can give you the best help.
What is a fixed rate home loan?
Fixed interest rate loans are home loans where the interest rate is set for a pre-determined period. Once the pre-determined period is over (usually 2 to 3 years), fixed loans typically change to some form of floating rate loan.
Most borrowers who choose fixed rate loan like the certainty – they know exactly how much they will be paying every month. The downside is that since the bank is taking on the risk of being exposed to interest rate fluctuations, borrowers are charged a higher interest rate compared to floating rate loans. Therefore, it is extremely important to refinance after your lock-in period to prevent from paying more than you should.
What is a floating rate home loan?
Floating interest rate loans are just the opposite – the interest rates reset periodically to match market rates. These market rates can be based on different benchmark rates, such as SIBOR, SOR, board rates or deposit rates.
If it is so unpredictable, why would borrowers take up floating rates? Well, floating rate loans typically offer lower rates than fixed rates, so borrowers may take the risks of fluctuations to save on lower monthly payments.
The key question – how to choose?
The choice of choosing either type of rates comes down to 2 main factors - 1) the near-term interest rate environment and 2) your need for certainty.
While no one can predict whether the near-term interest rate will stay stagnant, move up or down, there are a few economic indicators that you can look at.
For one, our benchmark rates are closely related to US rates. So, if the Federal Reserve announced that they are increasing rates in the coming months, it is a good prediction that Singapore rates will follow. Secondly, how the economy is doing. You’ll see that during a recession, interest rates are deliberately kept low – this is to encourage people to take up credit to spend and move the economy along. The opposite happens – banks and governments increase interest rates when the economy is doing better so that it doesn’t cause a bubble to form.
How is the interest rate environment now then? We can safely say since 2016, interest rates have been climbing slowly. Since the Federal Reserve has already started raising rates, the Singapore rates have followed. With better economic growth outlook this year and next, we think the trend is likely to move north in 2018. So, your best bet now would be to take up a fixed rate loan to lock in the rates.
Point number 2 is more personal – do you want to know exactly how much you need to pay per month to better manage your finances? If so, for possibly a few dollars extra a day, this ‘premium’ might be worth your peace of mind.
Generally, one should try to lock into favourable rates when the interest rate is low by getting a fixed-rate loan, and choose a floating rate when you think interest rates are likely to decline in the next 2-3 years.