If someone tells you 'aiya home loans are all the same one lah!' they are so so wrong. We at FindaHomeLoan explores the basics between fixed and floating (or known as variable) interest rates. No more excuse to say they are the same!
Types of Interest Rates
While looking for your housing loan Singapore, the first thing you look at is its interest rate. Borrowers normally look for loans with lowest interest rates. However it's better to start your search by first learning about the different types of interest rates for housing loan Singapore, and how they work.
There are two categories of interest rates; fixed and floating. The fixed housing loan rates remain fixed for duration of typically few years. In Singapore's context, 5-years is probably the longest housing loan tenure offered by banks for fixed housing loans. On the other hand, floating interest rates are at all-time low in recent years, making them more popular than fixed housing loans.
How do floating rates work?
They are usually quoted in the form of a benchmark rate plus/ less a spread. Benchmark rates commonly used are SIBOR (Singapore InterBank Offered Rate), SWAP (also known as SOR) and bank's board rates. As SIBOR and SOR rates are publically available on daily basis and is standard, there is almost no worry of lack of transparency. In the case of board rates, they are managed by the banks internally. Customers may remember the past years where banks had increased the board rates frequently, hence affecting the installments payable. However they have been stable in the recent years.
There are SOR and SIBOR variations based on time frames. The common variations in the market are 1-month or 3-month SIBOR and 3-month SOR. A 3-month SIBOR means this SIBOR rate is priced every 3 months. For example, 3-month SIBOR as of 1 January 2013 is 0.3%. It will be added to the spread, say 0.8%, resulting in a net interest rate of 1.1%.
This net rate will remain effective until 3 months later when the next 3-month SIBOR is effective on 1 April 2013. This approach works similarly to housing loans based on 3-month SOR. A 1-month SIBOR simply means it will priced every other month.
You can understand more about the Singapore SIBOR Rate trend on the SIBOR and SOR 2017 page.
Other variant of floating rate is fixed deposit savings rate. Home loans interest rate will follow the movement of these savings rates. Relatively speaking, savings rate are quite benign in Singapore. This is welcomed by home owners if their mortgage rate tracks this rate. DBS first launched a product that tracks such rate, known as FHR in 2015. Since then, UOB, OCBC, Maybank and Standard Chartered released their versions of fixed deposit-linked home loan products.
Fixed rates are fixed
Fixed according to dictionary means predetermined and not able to be changed. Fixed rates follow the same logic. Singapore banks offer fixed mortgage rates for 1 to 3 year period, unlike the 30-year fixed mortgage found in USA. After the fixed rate period expires, the mortgage rate will be variable, according to the loan contract.
Fixed rate is quoted as a whole number (example 1.28% fixed). There is no margin, as seen in variable rate.
If you prefer constant repayments, avoid fluctuations, reduce chatter on the dining table when interest rate goes up, then we recommend fixed rate.