Posts Tagged ‘Housing’

Choosing Between a Fixed-Rate and a Floating Rate Housing Plan

April 30th, 2013

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Any kind of loan, most especially a mortgage, can place a lot of strain on your finances, so it’s very important to choose a loan plan that is best suited for you. You need to consider a housing loan that will spare you from unnecessary expenses as well as needless stress. In this section, we’ll be discussing how to choose between a fixed-rate loan and a floating rate loan.

Though this isn’t at all a comprehensive guide, it can help you understand a few facts so you can make a more informed decision. If you have any specific concerns, be sure to ask a professional mortgage adviser.

The Fixed-Rate Loan

As you can probably gather from its name, a fixed-rate loan has a static interest rate. In Singapore, the rates remain unchanged only within the first three to five years, since perpetual fixed-rate plans are not available in this country.

At the end of the fixed-rate period, the interest rate will be transformed into floating rates. This will be placed below your lender’s board rate or variable rate, which in turn is determined by the SIBOR or SOR.

Take a look at the sample fixed-rate loan plan below:

FIXED RATE LOAN

PERIOD ———————— INTEREST RATES PER ANNUM
Initial year ——————— 1.15%
Year 2 ————————– 1.35%
Year 3 ————————- 1.45%
Year 4 onwards —————- 0.50 % below the Board Rate

Considerations for Choosing a Fixed-Rate Loan

A fixed-rate loan is ideal for you when:

1. You prefer interest rates that are more predictable.

You can be more secure about your monthly payments within the first few years or the fixed-rate period. This is very suitable for home buyers with limited finances, who can’t afford any sudden surprises as far as their monthly expenses are concerned.

2. There is a high interest-rate climate.

In a high interest-rate environment, your options are quite clear: a fixed-rate package will definitely come with a lower opportunity cost, as well as more predictable expenditures during the fixed-rate period.

Disadvantages That Come With Fixed Rate Loans

1. During a low interest-rate climate however, you will be met with higher opportunity costs. At such a situation, you would do better to opt for a floating-rate loan plan.

2. The interest rates of this type of loan are generally higher than those of floating-rate loans. This is because banks and lending institutions take more risks with a fixed-rate loan, and they need to take their financial security into account.

The Floating Rate or Variable Rate Loan

Unlike the fixed-rate loan, the interest rates on a floating rate loan fluctuate throughout the loan tenure. This type of loan is also called a variable rate loan, and it offers three alternatives on which the interest rate can be based. Take note that not all three alternatives are available in all banks or lending companies.

- a discount below the board rate
- a Spread or margin above SIBOR
- a Spread or margin above SOR

After the first few years of the loan tenure, the Spread typically increases, as so:

FLOATING-RATE LOAN WITH 1-MONTH SIBOR

PERIOD ————– INTEREST RATES PER ANNUM (SIBOR + SPREAD)
Initial year ———— 1-Month SIBOR + 0.75%
Year 2 —————- 1-Month SIBOR + 0.75%
Year 3 —————- 1-Month SIBOR + 1.00%
Year 4 onward ——- 1-Month SIBOR + 1.25%

Considerations for Choosing a Floating-Rate or Variable Rate Loan

A floating-rate loan is ideal for you when during low interest-rate climates. It’s always better to take a floating-rate or variable rate loan at these times, since this obviously results in lower interests and thus, more savings.

Disadvantages That Come With Floating Rate Loans

1. Interest rates fluctuate, so you have to be ready in case they grow higher.

Be sure that you will be able to make your monthly payments even in the times of high-interest rates. As a loan-taker, it would wise for you to acquire your mortgage at a time when interest rates are low, and observe the gradual increase of the rates. After the lock-in period, you may opt to refinance into a fixed-rate loan, as long as the exit costs don’t result in more expenses.

2. The rates in a floating-rate plan are less predictable

This is just a fact, so you will simply have to work around it. One thing you can do is to acquire a loan attached to a SIBOR or SOR with a longer tenure. A 12-month SIBOR or SOR changes only every twelve months, so you can be guaranteed that the rates will stay constant for a year.

You may also opt for a loan with an interest rate cap, which is an excellent precaution against an unexpected upsurge. If your bank or lender, for instance, sets a cap at an interest rate of 1.50% per annum, this is the highest amount you will have to pay, even during high interest-rate climates.

If you have any questions or concerns about which type of loan plan is best for you, and which will work best for your unique financial situation, it would do you well to contact a mortgage consultant for expert advice.

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