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Mortgage 101: Is Fixed Rate Better than Floating Rate?

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At a glance, understanding mortgage packages and the nitty-gritty of home financing topics can seem confusing or downright intimidating. After all, it involves a very long term repayment commitment that’ll affect a portion of your hard-earned income. If number crunching isn’t your forte, let our resident Mortgage Specialist weigh in with his expert advice that’ll ease your bank jargon-induced headache.

Fixed Rate vs. Variable Rate

According to our Mortgage Specialist, once you’ve decided to take up a home loan, you’ll find a variety of packages offered by banks. It can be categorized into two types: fixed rate loan or variable rate loan. Basically, the former is a safe type of loan, which means the interest rate given to you in the package will not change throughout the duration of your mortgage repayment. You can rest easy knowing your repayments are literally fixed, undisturbed should there ever be turbulent market conditions that can have a rising effect on interest rates. The downside? It’s usually set higher than its floating rate counterpart due to the elimination of risks.

On the other hand, the variable rate loan itself or more commonly known as a floating rate package consists of a few types (SIBOR, Internal Board Rate, SOR, etc.) and are subject to change throughout the course of your repayment period. This is due to the interest rate fluctuating according to the prevailing market rate. The Singapore key indicator of interest rate is the 3-month SIBOR Rate. It was around 1.1% in Dec 2017, and within a year, it increased to about 1.88% in December 2018. Despite the risks that come with this type of loan, homebuyers tend to find this the more enticing option as floating rates are typically lower than fixed rates.

Interest Rate Hike Ahead

The current rising inflation and a booming economy in the US have motivated the US Federal Reserves to raise interest rates, consequentially raising our interest rates on home loans to boot. With such tumultuous market conditions with regards to interest rate – floating interest rates are expected to rise from 1.5% to 2.4% – such mortgage repayments are going to start feeling the pinch instead of a manageable avenue for monthly home refinancing.

What does Ohmyhome’s Mortgage Specialist recommend?

Traditionally, most banks you’ll encounter will offer a fixed rate home loan package that’ll last 2-3 years only. However, our Mortgage Specialist recommends a new home loan package offered by one of the major banks that provides a 5-year fixed rate package. With the economic conditions in the US forecasting an upward trajectory for interest rates, our Mortgage Specialist has only this to say about this new 5-year fixed rate package – peace of mind knowing you’re safeguarding yourself from rising interest rates.

Have we piqued some unanswered questions? Ask our Mortgage Specialist for free! Call 9755 9103 now.

Sources: SCMP, ABS, Business Insider


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