CNA explains: As fixed interest rates on home loans rise, should you opt for a variable rate package instead?


SINGAPORE: Earlier this week, Singapore’s three largest banks – DBS, OCBC and UOB – raised their fixed interest rates on home loans to between 4.25% and 4.5%.

It was the second hike for banks in less than two months, boosted by factors such as the US Federal Reserve raising the benchmark policy rate and core inflation in Singapore hitting 5.3% in September.

With interest rates set to rise further, should homebuyers lock in a fixed rate home loan now or look to variable rate packages instead?

CNA posed the question to some real estate analysts and also asked how they expect things to change over the next year.

First of all, what is the difference between a fixed and variable rate mortgage?

A fixed mortgage has interest rates that remain unchanged throughout the lock-in period. A floating loan, on the other hand, fluctuates throughout the term of the loan, depending on the economy and market conditions.

In Singapore, a variable rate mortgage is usually pegged to the Singapore Interbank Offered Rate (SIBOR), a Fixed Deposit Based Rate (FDR) or the Singapore Overnight Rate Average (SORA). The first two are being phased out and the floating interest rate will soon be pegged only to the SORA.

The three-month compound SORA rose from 0.1949% at the start of this year to 2.6994% on Friday (November 18).

There are also hybrid loans, where part of the mortgage can be structured with a fixed rate and the rest with a variable rate.

How much do homebuyers have to pay in monthly installments now?

Based on a loan of S$500,000 with a 25-year term, an HDB apartment buyer would pay S$2,709 per month under the two-year fixed-rate DBS scheme with a rate of interest of 4.25% per annum.

A similar variable rate loan with DBS charges the SORA compounded over three months plus a margin of 1 percentage point. This gives an interest rate of 3.69% per annum based on November 18 rates, meaning a homebuyer would pay S$2,554 per month.

If you’re paying less on a floating loan, shouldn’t you just go for it?

It is not so simple.

Given that interest rates are expected to rise for the foreseeable future, it might still make sense to take a fixed-rate package, said Mr. Bruce Chow, head of SRX Loans Concierge at real estate platform 99. co.

“As it stands – there’s no certainty when it comes to rates. Rates could go down if there’s another global pandemic. But right now there’s inflation in around the world and for the Fed, their main concern is to counter inflation and that involves rate hikes,” he said.

Analysts say homebuyers need a good understanding of their situation, life plans, cash flow, assets, liabilities and risk tolerance before choosing home loan.

Mr Paul Wee, vice-chairman of PropertyGuru Finance, said homebuyers who believe interest rates will continue to rise could opt for fixed-rate loans.

“Others would believe that rates have risen significantly and have little scope to go much higher. For them, it would make sense to go with floating rates,” he said.

Those who don’t like volatility should also opt for a fixed-rate loan, said Lee Sze Teck, senior research director at Huttons Asia.

“However, if interest rates were to change direction later on, going for a long lock-in period, like five years, would prevent buyers from changing and they could end up paying more for many years.

If they’re worried about that, buyers can consider loans with a shorter lock-in period, like one or two years, he said.


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