Fixed vs Floating Home Loan Rates: Which Is Right for You?

Choosing between a fixed or a floating home loan rate is one of the more important decisions a homeowner makes. The right choice depends on your circumstances, how comfortable you are with rate swings, and how banks are pricing their products based on interest-rate expectations.

What are fixed rates?

A fixed-rate home loan keeps the interest rate the same for a set period, typically two to five years. Your monthly repayments stay unchanged during that period, which makes budgeting straightforward and removes the risk of monthly instalments increasing if market rates go up.

Fixed-rate packages can feel reassuring when you want certainty. One trade-off is that you will not benefit from any rate falls during the fixed period — your rate stays the same until the fixed term ends.

Fixed rates may suit you if:

• you prefer predictable monthly repayments

• you want protection from rising interest rates

• you value peace of mind over chasing short-term savings

What are floating rates?

A floating-rate home loan has varying interest rate which changes in line with market reference rates, such as SORA in Singapore. It comes with a spread (an additional percentage) charge above the reference rate. When the reference rate moves, your loan rate and monthly instalment move too.

Floating-rate packages can offer flexibility. If market rates fall, your repayments will fall. If they rise, your repayments will increase. Floating loans are often chosen by homeowners who expect to refinance, make extra repayments, or who are comfortable managing fluctuations.

Floating rates may suit you if:

• you expect interest rates to remain stable or fall

• you want the flexibility to refinance or make partial repayments without penalties

• you are comfortable with possible changes in monthly repayments

Which is lower?

The relative cost of fixed versus floating rates is not fixed in stone. Rather, it depends on how lenders expect interest rates to move in future and how they price risk.

If banks anticipate that market rates will fall, they may price some fixed packages competitively, making fixed rates relatively attractive. If banks expect rates to rise, fixed packages may carry a premium compared with current floating packages offers. In short, whether fixed or floating starts out cheaper depends on banks’ expectations and market pricing at the time.

Fixed-rate packages revert to floating rate at the end of their lock-in period (i.e. they are never perpetually fixed at that fixed rate), often at an interest rate that is higher than any prevailing loan rates available. Likewise, it is the same for floating-rate packages after their lock-in period. Regardless which package you started off with, you should always review your loan each time towards the end of the lock-in period.

Always check the current offers and speak to a mortgage specialist — a single comparison can reveal which option is more cost-effective for your situation right now.

Other factors to consider

Lock-in period
Most loans come with a lock-in period during which switching or fully repaying the loan may incur penalties. Compare both rates and the length and cost of any lock-in.

Fees, promotions and cashback
Banks sometimes include legal fee offsets, waived valuation fees or cashback promotions. These extras can materially affect the overall value of a package. Such benefits also comes with a 3-years claw back period e.g. should you refinance to a different bank within 3 years, the bank will claim back these amount from you.

Flexibility
Look at features such as partial/full waiver of penalty upon partial repayment, waiver of penalty upon sales, or free conversion to a different package with the same bank even within the lock-in period. Flexibility may be more valuable to you than a loan package with marginally lower interest rate.

Your plans and risk tolerance
How long you intend to keep the loan, whether you expect changes in income, and how comfortable you are with rate swings should all influence the choice.

Conclusion

There is no universal rule that fixed rates are always higher than floating rates or vice versa. The relative pricing depends on lender expectations and current market conditions. Choose the option that fits your financial goals, risk appetite and timeframe.

Mortgages can be daunting and complicated. Speak to our mortgage specialists at Mortgage Crunch. As homeowners ourselves, our mission is to help you crunch your mortgage costs with ease, delivering the best cashback and a hassle-free experience every step of the way.