Interest rates have been climbing and will continue to do so in 2023. The US Federal Reserve is expected to raise interest rate levels multiple times this year, with the US federal funds rate projected to reach a level of 5.25% to 5.50% this year.
What impact does this have on your mortgage rate? For example, if you are a homeowner who chose a floating-rate bank loan to finance your property, your monthly mortgage repayment amount will also increase month by month (as interest rates change). At the same time, local banks may raise the interest rates on their mortgage packages in the future (which could further increase your repayment amount).
With interest rates continuing to climb in 2023, how can homeowners get the most value for their money when taking out a home loan? Many might think that a fixed-rate home loan is the best way to “stay away” from rising rates.
Today, we will discuss and evaluate whether choosing a fixed-rate home loan can help (borrowers) avoid the uncertainty of potential interest rate hikes and alleviate repayment pressure.
Table of Contents
What is a Fixed-Rate Mortgage?
Simply put, a fixed-rate home loan is a loan where the interest rate remains unchanged during a lock-in period, which typically lasts from two to five years (depending on the lock-in term).
Fixed-rate home loans offer homebuyers peace of mind with a fixed repayment rate in the short term, allowing them to better plan and manage their finances and eliminate the uncertainty brought by economic instability.
With inflationary pressures continuing to mount and current interest rates showing no signs of decreasing, those with a lower risk tolerance may find a stable fixed-rate mortgage to be an ideal choice.
What Happens After the Fixed-Rate Period Ends?
When the fixed-rate period ends, the interest rate on the fixed-rate home loan will convert to a floating rate. The specific floating rate value is determined by your (lending) bank. Typically, the new rate will be higher than the rate during the lock-in period.
What can you do at this point? After the lock-in period ends, homeowners can choose to refinance their home loan (without incurring any prepayment penalties). Refinancing allows homebuyers to actively manage their mortgage and keep interest costs low, which is why it is popular among them.
Homeowners can switch (lending) banks to get a more competitive mortgage package.
⚠️ Please note that when refinancing a home loan, there may be additional costs, such as legal transfer fees. However, banks often offer you incentive packages to help cover these costs. Therefore, please consult your mortgage broker or contact the bank for more related information.
How Should You View Floating-Rate Mortgages?
The interest rate on a floating-rate home loan is calculated based on a certain reference rate (such as the Singapore Overnight Rate Average, SORA).
Banks will use this as a reference to determine the interest rate. The actual interest rate of the loan will be higher than the reference rate, as banks must charge an additional fee on top of the benchmark rate to make a profit (also known as a “spread”).
A floating-rate loan, as the name suggests, means its interest rate can change every month or every few months. This means that if interest rates continuously rise in the short term, it will lead to higher repayment amounts for homeowners.
One thing to note about floating-rate home loans is that their interest rates tend to be slightly lower than fixed-rate mortgages. This is because fixed-rate home loans come with a guarantee of certainty and stability, and the associated cost is borne by the homeowner.
As of February 23, 2023, the standard fixed-rate loan packages offered by most banks have an interest rate of about 3.88%. In contrast, the most competitive home loan package on the market (based on the lowest rate offered in the first year) is a floating-rate home loan with a rate of 3.78% (as of February 23, 2023).
Therefore, if a homeowner believes that interest rates might fall in the near future, a floating-rate mortgage might be more appealing than a fixed-rate one, but the risk always exists. Of course, the reverse is also true; in a rising interest rate environment, a fixed-rate loan could be a great choice!
Which Fixed-Rate Mortgage is Best for Me?
On this question, if you have already decided to switch your original home loan to a fixed-rate home loan, how should you choose the right fixed-rate loan for yourself?
Fixed-rate home loans may vary in interest rate size, length of the lock-in period, and other attached conditions (such as free conversion packages). All these are factors you may need to consider before making a decision.
Leo believes, “Fixed-rate packages are still a great tool for managing interest rate risk, especially for consumers who are more risk-averse and sensitive to interest rate changes. However, it is important to note that if the interest rate trend reverses, consumers might end up paying a higher rate for the remainder of the lock-in period.”
Want to switch your home loan to a fixed-rate loan? You can contact Anjia SG’s mortgage experts to help you compare home loan packages offered by major banks, check the latest interest rates, and then choose the best refinancing plan.
Refinancing Your Mortgage in 2023
When choosing a home loan package, many factors need to be considered, so you may have to make a tough choice. But keep in mind, there is no one-size-fits-all loan package! A home loan that is right for you may not be right for others; it depends on your personal financial situation and risk appetite.
Therefore, it is particularly important to consider all factors and understand all available options. If you need help, you can always schedule a professional consultation with our mortgage experts.
Our experts will provide you with professional one-on-one service, offering sincere and objective advice and opinions.
We can also act as your agent to help you apply for a home loan, handling all the issues in the application process for you, free of charge!
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