Choosing the right interest rate package for your mortgage is a critical decision that can significantly impact your finances. Each rate type has its own advantages and trade-offs, and the right choice depends on your financial goals, budget, and the current economic environment.
In Singapore, the choice often hinges on local benchmarks like the Singapore Overnight Rate Average (SORA) and how they influence home loan rates.
Understanding how these rates work will give you the confidence to make an informed decision.
What is a fixed interest rate?
A fixed interest rate remains unchanged throughout the loan tenure or for a specified period. This makes your monthly repayments consistent, which means stability and predictability. Fixed rates are ideal during periods of rising interest rates, as they shield borrowers from potential increases in borrowing costs.
In Singapore, fixed-rate mortgage packages are widely offered by major banks such as DBS, OCBC, and UOB. These packages typically lock in rates for two to five years, after which they may convert to floating rates. For example, a 2022 report from DBS showed that fixed rates for private property mortgages ranged between 3.5% and 4.5%, offering a predictable repayment structure even as market rates fluctuated.
Key benefits of fixed rates include the ability to budget with confidence and protection against unexpected rate hikes. This is especially valuable for HDB owners or buyers of private condominiums who rely on consistent monthly budgeting.
What is a floating interest rate?
Floating or variable interest rates are tied to benchmarks like SORA. This means your rate can fluctuate over time based on market conditions. While floating rates often start lower than fixed rates, they can rise or fall, impacting your monthly repayments.
For instance, during periods of rate cuts, such as the 2020 pandemic, many floating-rate borrowers in Singapore saw their mortgage repayments decrease. However, during times of rate hikes, like over 2022 and 2023, these borrowers experienced higher repayment costs.
Key benefits of floating rates include potential savings when rates decrease and greater flexibility for borrowers who may refinance or pay off their loans early. For example, if you’re a young professional planning to upgrade to a larger property in the near future, floating rates may give you the flexibility to refinance when you need to.
How do fixed and floating rates compare?
FEATURE | FIXED RATES | FLOATING RATES |
Rate stability | Remains constant | Changes with market conditions |
Payment predictability | Highly predictable
(Loan repayments are agreed upon upfront) | Varies over time
(Due to changing interest rates) |
Initial interest rates | Typically higher | Often lower |
Impact of market rates | No impact
(Interest rate remains unaffected by fluctuations in market rates) | Direct impact
(Interest rate adjusts based on market conditions, affecting your repayments) |
Flexibility | Limited
(Early repayment might incur penalties or lock-in restrictions) | High
(Easier for prepayments or refinancing if needed) |
Which mortgage interest rates should I choose — fixed or floating rate?
The decision between fixed and floating rates depends on your financial priorities and your sense of the economic outlook. Fixed rates are better suited for borrowers who value repayment stability and want to hedge against anticipated rising rates. On the other hand, floating rates may be more appealing for those who are comfortable with variability and seek potential cost savings.
For many Singaporeans, choosing between fixed and floating rates can also depend on your property type. HDB loans are tied to CPF housing loan rates, whereas private property buyers often compare both fixed and floating packages from banks.
Like many Singaporeans, you might consider a fixed rate if you prefer certainty in your monthly repayments, don’t enjoy taking on risk, or anticipate rising interest rates. Floating rates could be a good fit if you have financial flexibility, expect rates to decrease, or plan to refinance or pay off your loan early.
It’s also helpful to know that experts in Singapore tend to agree that there is an observable correlation between home loan rates in Singapore and the US Federal Reserve rates, so this could also be something to consider in your plan.
In Singapore’s mortgage market, even a small difference in rates can result in significant cost savings. For a $1 million mortgage over 25 years, a 0.5% rate difference can save you approximately $25,000 in interest. Using a loan matching platform like Lendela can help you compare loan packages quickly and find a mortgage that aligns with your financial goals.
This is why understanding the differences between fixed and floating rates is crucial to make an informed decision on your mortgage. Choosing the rate that best suits your needs can mean the difference between stability and stress. With tools like SORA-pegged calculators and platforms like Lendela connecting you with personalised loan offers from trusted lenders, you can confidently choose your ideal loan option tailored for your homeownership journey.