What is the Difference Between Fixed and Floating Interest Rates?

Posted · Add Comment
What-is-the-difference-between-fixed-and-floating-interest-rate

When choosing a mortgage, will a fixed or variable rate best serve your needs? Fixed-rate mortgages are what they sound like: the payment rates are set at the beginning and do not change for the entire course of the term. If the market rates go up you are protected. However, if rates go down you do not get to take advantage of these savings. Constant monthly payments make it easy to budget your life around.

 

On the other hand, floating interest rates can change, but they typically start at a rate lower than the fixed-rate alternative. Choosing a variable rate mortgages means that you are betting that the average rate will be as good, if not better than, the fixed rate alternative. However, anyone in finance will tell you that you need a crystal ball to know the future of mortgage rates in Singapore.

 

In 2001, a New York University’s report analysed 50 years of mortgage data and concluded that roughly nine times out of ten, a borrower would have been better off sticking with a variable rate rather than going with a fixed rate. However, the fact still remains that two to three-year, fixed mortgages have always been a very popular choice. There could be two significant reasons for this decision. First of all, risk tolerance – if a borrower or their spouse is going to stay up at night worrying if rates could go up. It is probably not worth the anxiety and stress for those borrowers.

 

Secondly, a fixed rate is the best way to go as it unlocks significantly more purchasing power compared to any variable rate products. Fixed rates allow you to access more purchasing power and disposable income in most cases but you will have to pay a higher rate for that privilege.

 

A common fear and misconception is that if rates doubled overnight, payments would double as well. That is not the case. Only a portion of your payment is interest, the rest is principal and goes to work paying back the original loan payments. The variable rates are tied to the lending benchmark rates (SIBOR or Bank Board Rates). Those with the ability to decide if rates increase or decrease only meet a couple of times every year. Historically, it has always been very stable and changes typically come in small increments but not always the case.

 

If you are really concerned, some variable rate lenders will allow you to switch at any time at their available packages at that time for the remaining term. This is known as “conversion”. To make the best decision for your home mortgage, be sure to so your research on market fluctuations during the period of your loan. It is also crucial to compare housing loan rates, in order to avoid having to refinance your home loan in Singapore.

 

Comments are closed.

 
 
 
 
 
DMS