One of the first things homeowners must decide on is the type of home loan to take – fixed-rate loans or floating-rate loans. But as we begin to see the downward trend in fixed rate packages from Q2 2024, the question still remains – should I be taking up a fixed or floating home loan package?
This article will discuss how we can better prepare for mortgage rates from now till the end of 2024.
While there is no better loan per se, as it largely depends on your risk appetite and financial circumstances, you might consider a shorter lock-in-period loan package. It would also be beneficial to have a free conversion option after 12 months as part of the loan package. This would safeguard customer interest in the event rates begin to taper.
In addition, opting for packages with the waiver of penalty due to sale, if you are considering selling the property during the lock-in-period, provides flexibility. .
Given that a home loan is likely to be the biggest and longest financial burden a home owner in Singapore will take on, choosing the right home loan that meets your financial needs is more important than ever.
Fixed-rate home loan vs floating-rate home loan
What is a fixed-rate home loan package?
A fixed-rate home loan package is a loan that offers a fixed interest rate for a set term of the loan, such as two, three, or five years. This means that during this lock-in-period, you will pay the same interest rate as when you first endorsed the loan, regardless of what happens to interest rates later on.
After the fixed interest rate lock-in-period is over, the interest rates for the fixed rate home loan will be converted to a floating interest rate. (This is also the best time to refinance – track your mortgage loan expiry with iTrack on the IQrate app)
The interest rate may be equal to or higher than existing floating rate mortgage packages on the market depending on the bank spread. A bank spread is an additional percentage that the bank earns from you in addition to the cost of lending you the principal. Besides bank spread, the reference rate plays a part too, i.e. SIBOR, SORA, Fixed Deposit Rate and Bank’s Board Rate.
Fixed-rate home loans are ideal for:
- Homeowners who want to keep mortgage repayments constant for ease of financing
- Homeowners with low-risk appetite
- Homeowners who want certainty in a volatile interest rate environment
- Homeowners with a tight fixed budget
What is a floating-rate home loan package?
A floating-rate package has an interest rate that fluctuates with changes in market conditions.
The frequency at which floating-rate home loans adjust their interest rates depends on the type of loan you take out, and the amount of your monthly instalment is likely to change when the interest rate changes.
Floating rates are usually linked to an index or to the bank’s internal board rate. SOR (Singapore Dollar Swap Offer Rate), SIBOR (Singapore Interbank Offered Rate), Fixed Deposit Based Rate (FDR), or Singapore Overnight Rate Average (SORA). The first two are being phased out and the floating interest rate will soon be pegged only to SORA.
Floating-rate home loans are ideal for:
- Homeowners who have buffer in their budget for interest rate increases
- Homeowners who expect interest rates to trend down instead of up
- Homeowners who have high-risk appetite
- Homeowners who want to take advantage of interest rate fluctuations to get a competitive package
Should you opt for a floating home loan package?
As fixed home loan interest rates have dropped over the past few months, it may make sense to turn to fixed rate packages now.
Let’s take this for an example:
- Two-year fixed rate package
- S$500,000 loan with a 25-year tenure
- 2.90% interest rate per year
- Monthly repayment: S$2,346 a month
Under the same circumstance,
- Floating rate package with 3m compounded SORA
- 4.15% interest rate per year
- Monthly repayment: S$2,681 a month
It may look like you will be paying less on a fixed home loan, but given that interest rates are expected to be further reduced in the foreseeable future, taking a floating rate loan could save you even more in interest payments over the long run.
If you are able to embrace volatility, you can consider a floating rate loan. If you believe that the that rate hike is at its tail-end and are likely tapering soon, opting for floating rates would be a good option.
With a strong correlation between home loan rates in Singapore and the US Federal Reserve rates, global factors like the war in Ukraine and middle east, it looks like interest rates are set to experience moderate adjustments in the year 2024.
Forecasting home loans rates in Singapore in 2024
Prices for property in Singapore continued their upward trend in the third quarter of 2022, despite rising home loan rates. As global interest rates remain high, borrowing costs in Singapore will likely continue to maintain.
Noting that the US Federal Reserve has plans to reduce its benchmark rate, it is likely that US Federal Reserve Rates will be kept above 5%.
In addition, wars also cause inflation, with demands for goods and services rising alongside the price of oil. As the Russia-Ukraine war persists and the Israel-Hamas wars rage on, coupled with tensions of China-Taiwan threats, there is a high chance of interest rates remaining high to combat inflation pressures.
That said, it is hard to say where interest rates will go next, but with the economic uncertainty right now, we should be aware of the factors and situations influencing it, and make informed decisions.
Even in a rising interest rate environment, there are opportunities to save. Refinancing for a better home loan package is one potential move you can make.
Speak to IQrate today about your home financing plans. We will help guide you through the next steps in your home financing journey and provide advice on how to make the most of your mortgage.
Your financial future starts with the right advice
In the ever-evolving landscape of home loans in Singapore, making informed decisions is key to securing your financial future.
Our dedicated team of expert advisors at IQrate is here to guide you every step of the way. Don’t let uncertainty hold you back; take the first step towards achieving your homeownership dreams today.
