Fixed floating or hybrid: Which home loan package works for you as interest rates rise
Fixed floating or hybrid: Which home loan package works for you as interest rates rise. Some homeowners who have taken out floating rate loan packages may face a rude awakening as mortgage rates threaten to skyrocket.
Experts warn that switching to a fixed-rate package may be difficult, as some banks, including Maybank and Standard Chartered, have discontinued such offerings in recent months.
On Tuesday, DBS, Singapore’s largest lender, discontinued its five-year fixed-rate HDB package (June 28).
Homeowners who are concerned about rising interest rates want to return to fixed rates, according to Mr Lee Meng Choe, executive director (advisory) at financial services firm Gen Financial Advisory.
The issue is that fixed-rate mortgages still available from banks are now more expensive than the rate on a HDB loan, which is set at 0.1 percentage point above the 2.5 percent Central Provident Fund Ordinary Account rate.
They are also not permitted to return to the HDB after obtaining a bank mortgage. These people can select from fixed, floating, or hybrid packages.
The Straits Times applied the rule to three Singapore banks’ loan packages, assuming a $500,000 mortgage over 25 years. Borrowers who take out a DBS two-year fixed-rate package at the current rate of 2.75 percent would pay $2,307 per month.
A two-year fixed-rate package from OCBC or UOB at 2.65% would have monthly payments of $2,281. So the DBS package costs an extra $26 per month.
Since the fourth quarter of last year, when three-year fixed rates were at 1.15 percent, fixed-rate mortgages have skyrocketed. They have risen to 2.75 percent, a 1.6 percentage point increase. So, would fixed-rate mortgages still be appropriate for some borrowers? Fixed-rate packages, according to Mr Lee, are ideal for people with steady incomes who dislike risk and uncertainty. A fixed rate also simplifies household budgeting for a homeowner because there is a fixed sum to pay each month that can be factored into a budget.
However, Ms Maryanne Phua, OCBC Bank’s head of home loans, stated that fixed-rate packages typically include pre-payment penalties if the loan is redeemed or prepaid during the lock-in period. Ms Phua advises homeowners to consider this option only if they have no immediate plans to pay off their mortgage or sell their home. She recommends Sora-pegged floating packages with shorter lock-in periods if they intend to pay off their mortgage or sell the property soon.
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