CNA Explains: Should You Choose a Fixed or Variable Mortgage With Interest Rates Rising?

Singapore: Earlier this week, the three biggest banks in Singapore – DBS, OCBC and UOB – raised fixed interest rates on home loans Between 4.25 and 4.5%.

This was the second bank rise in less than two months, driven by factors such as the US Federal Reserve raising its benchmark lending rate and Singapore’s core inflation rate rising to 5.3% in September. was.

With interest rates set to rise further, should homebuyers lock in to fixed rate mortgages now or switch to variable rate packages instead?

CNA asked some real estate analysts how they expect the situation to change next year.

First, what is the difference between fixed and variable rate mortgages?

Fixed mortgages do not change interest rates during the lock-in period. Floating loans, on the other hand, fluctuate over the life of the loan depending on economic and market conditions.

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

The 3-month compounded SORA climbed from 0.1949% earlier this year to 2.6994% as of Friday (18 November).

There are also hybrid loans that can consist of part of the mortgage with a fixed rate and the rest with a variable rate.

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

Based on a 25-year contracted S$500,000 loan, flat buyers of HDB will pay S$2,709 per month on DBS’s 2-year fixed rate package (at 4.25% p.a.).

A similar variable rate loan by DBS will charge 3 months compounded SORA plus a margin of 1 percentage point. This translates to an interest rate of 3.69% per annum based on the November 18 interest rate, which will cost homebuyers S$2,554 per month.

If your variable loan pays less, shouldn’t you go for it?

It’s not that simple.

Given that interest rates are expected to rise in the near future, it still makes sense to go for a fixed-rate package, said Bruce Chow, head of SRX loan concierge at real estate platform 99.co. increase.

“In the current situation, there is no certainty about interest rates. In the event of another global pandemic, interest rates could fall. “The main concern is to fight inflation, with rate hikes.”

Analysts say home buyers should fully understand their situation, life plans, cash flow, assets, liabilities, and openness to risk before choosing a mortgage package.

PropertyGuru Finance vice president Paul Wee said homebuyers who believe interest rates will continue to rise may opt for fixed-rate loans.

“Some people will think that interest rates will rise significantly and there will be few runways for them to rise significantly.

Those who hate volatility should opt for fixed-rate loans, said Lee Shi Teck, senior director of research at Hattons Asia.

“But if interest rates then change direction, choosing a long lock-in period, like five years, could prevent buyers from switching and end up paying more for many years. I have.

He said buyers could look at loans with short lock-in periods, like a year or two, if they were worried about it.