When choosing a home loan, it’s natural to gravitate towards the lowest mortgage rates. After all, who doesn’t want to save a little extra? But is the lowest rate always the best deal?
Mortgage rates in Singapore have been fluctuating over the years, rising from historical lows during the pandemic to a more competitive but uncertain landscape today. However, the decision isn’t as simple as it seems. Fixed or floating, short-term savings or long-term security?
In this guide, we’ll help you break down the complexities of mortgage rates and arm you with the knowledge to make a smart, informed decision for your financial future.
Which is better – Fixed vs Floating Rate?
When comparing mortgage loans, selecting the lowest rate may not always be the most ideal. The choice between fixed and floating rates depends on more than just the numbers. Floating-rate loans can be appealing if you’re willing to take on some risk, especially if interest rates are forecasted to fall. If rates fall, a floating rate could save you money in the long run.
On the other hand, fixed-rate loans offer stability, which is ideal if you prefer certainty in your monthly payments, especially in a volatile market. This makes them a great option if you have a fixed budget. Just be sure to review your mortgage before your lock-in period ends to avoid higher rates.
Floating rates come with more variability, as they fluctuate with the market. While some packages offer interest rate caps to limit how high rates can go, there’s still a risk of rising costs if the market shifts suddenly. Additionally, floating rate loans may come with features like interest offset accounts, which allow you to earn interest on your balance, helping to reduce your overall payments.
In summary, fixed rates provide security and predictable payments, while floating rates offer more flexibility and potential savings if the market moves in your favour. If you’re seeking the lowest mortgage rates, fixed rates might initially seem appealing, but floating rates could end up being more competitive over time, especially if interest rates decrease as forecasted. Ultimately, the choice depends on your financial goals and risk appetite.
Other Important Factors to Consider
When looking beyond interest rates, several key factors can affect how much you pay for your mortgage in the long run. Aside from interest rates, aspects like loan tenure, lock-in periods, and additional fees also shape the overall cost of a home loan. By considering these factors, you can potentially save money and select a mortgage which aligns with your budget.
Mortgage Tenure
The tenure of your mortgage refers to the length of time you take to repay your loan. It significantly affects both your monthly repayments and the total amount of interest you’ll pay. A longer mortgage tenure typically results in lower monthly repayments, making it easier to manage your finances, especially if you have other financial commitments like car loans or are planning to invest in additional properties. This can help improve your cash flow and keep your Total Debt Servicing Ratio (TDSR) within limits. This is especially crucial if you are close to the borrowing cap.
Balancing the length of your mortgage with your current financial situation and future goals is essential to making the right choice.
Lock-in Period
The lock-in period refers to a fixed initial duration of the mortgage loan. It typically ranges from 1 to 3 years
Breaking the contract during the lock-in period usually incurs a penalty, which can be significant. For example, a cancellation fee of 1.5% on a S$1,000,000 loan translates to a S$15,000 penalty. Consider your long-term financial plans and market outlook to determine if the duration of the lock-in period interferes with your plans.
Waiver of Penalty Due to Sale
Some banks offer waiver of penalty due to sale if certain conditions are met, thus understanding the conditions is crucial if plans to sell are already in place.
Partial Prepayment
Some (packages) allow partial prepayments, letting you pay off part of your mortgage early. This reduces the total interest you’ll pay over the mortgage’s lifespan and lowers your monthly payments. However, the decision to prepay should be weighed against other potential investment opportunities that could offset interest payments.
Cash Rebates and Discounts
Most banks often entice borrowers with cash rebates or subsidies during refinancing. These benefits can help cover refinancing costs and reduce your overall expenses.
Summary
Choosing the right mortgage involves more than just selecting the lowest interest rates. Factors such as mortgage tenure, lock-in periods, and features like partial prepayments and cash rebates play a crucial role too. Whether you lean towards fixed or floating rates, it’s essential to align your decision with your financial goals and future plans.
By understanding these factors and consulting with Redbrick mortgage advisor, you can make a well-informed decision. Professional advice will be provided based on your personalized needs and financial goals for a competitive home loan that works best for you in both the short term and the long run.
