Mortgage Options in Singapore – The Difference between Fixed and Variable Rates

You’re ready to buy your first home in Singapore, and now you need to figure out a mortgage and what type is best for you. There are over twenty banks in Singapore that sent out fliers and packets, and the wealth of information can feel overwhelming to buyers as they try to decide what type to go with. Portals like PropertyGuru can help you understand the differences between the types of mortgages for housing in Singapore. The types of mortgages can be broken down into three different categories:

•    Fixed rate

•    Variable Rate (floating)

•    Interbank Market Pegs (IMP)

Fixed Rate

A fixed rate mortgage, also known as a conventional mortgage, is a rate for payment that is set for a specific amount of time. You can get them done for periods of time, such as one, two, or three years. Once the fixed period for the rate ends, the loan will revert to a variable rate.

A fixed rate mortgage means that how much you pay each month won’t change for the period that you choose to go with. If you decided on a three-year fixed mortgage, then your payment amount won’t change at all in those three years. This means that you won’t have to worry about your rates going up without much notice.

During the term of the fixed rate, most banks will require that you stay with them. This means you can’t go to other banks to see if you can get a better deal in that time. You must wait until the term is over with before you can see if you want to change banks.

Since the rates stay fixed, the homeowner cannot take advantage of any changes in rates during the fixed period. You will also end up paying higher interest rates with this type of mortgage.

Variable Rate

Also known as adjustable-rate or floating rate mortgages, variable rate mortgages depend on the bank’s Board Rate (BR) minus the discount they are willing to give to the homeowner. Variable rate mortgages usually offer lower interest rates to homeowners.

The downside is that the rates for your payments can change with barely any warning. In some cases that could mean a lower cost, but it can also mean that at times you might have a much higher cost to pay. This type of loan will save you quite a bit in interest over time in the life of the mortgage, however.

If you make the choice to go with a variable rate mortgage, you will want to check a few different banks, as the rate will change from one bank to another.

Interbank Market Pegged and SIBOR/SOR

These are a form of variable rate mortgages but with more transparency for the borrowers, as the rate is connected to the interbank market rate.

•    SIBOR stands for Singapore Interbank Offered Rates, which is a rate that the banks use when lending money to each other. This rate is publically available to borrowers. You can choose different lending periods, from one month, three months, six months, and twelve months. If the three-month rate is used, then every three months the rate will be reviewed and adjusted.

•    SOR, which stands for Swap Offer Rate, works in much the same way, with a slightly higher rate because it is based on the exchange rate from the U.S. to Singapore currency. When SIBOR’s rates go down, then what you will be paying for SOR will be better, but the rates for it can go much higher when SIBOR is up at its peak. SOR is considered unpredictable and more volatile, so many borrowers have moved away from using them, instead choosing to go with SIBOR.

Deciding which of these is Right for You

Now that you know about the different types, how are you able to decide which is best for you? Deciding on the loan will depend on how you want your payments to work.

If you want your monthly payment to remain the same or you can’t have the chance of the rate going up, then you’ll want to go with a fixed rate mortgage. This will keep the payments stable, and you can plan your finances around that rate.

If you want to be able to take advantage of the changes in rates, allowing that some months will be lower even if others are higher, then variable rate mortgages are best. If you go through a bank, they are more stable than the market-pegged, and the bank will notify you thirty days in advance of changes.

If you are particularly savvy and knowledgeable in interest rates and how they work, then you might consider going with market-pegged. While less stable, a savvy property owner could take full advantage of the lower rates to save money.

Take your time and check the different banks to find what is right for you.

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