Fixed or floating home loan – which is better?

By Lynette Tan

If you've only a minute: 

• A fixed rate loan is useful in a rising rates environment, since the borrower can “lock-in” the rate.
• With a floating rate mortgage, the interest rates are tied to a reference rate and the borrower will need to be prepared for any changes in the reference interest rates.
• Ultimately, it comes down to whether you prioritise certainty or the potential for lower interest rates.
• It is best to consult a mortgage specialist for a home loan consultation to get guidance on which loan suits you best.  

Mortgage rates in Singapore have been heading north in line with global interest rates, with fixed home loan rates offered by local banks reaching up to 4.5% per annum (pa) by the end of 2022.

With the current economic uncertainties and rising costs, most analysts are expecting that Singapore banks will unlikely slash their home loan rates in 2024, despite expectations that the US Federal Reserve will cut its benchmark interest rate at least three times this year

Going forward, interest rates are unlikely to drop drastically. The question on many borrowers’ mind is: “Should I lock in a fixed rate home loan or opt for a floating rate package for potentially lower rates instead? 

Fixed vs floating rate home loans – what are the differences?

A fixed rate home loan comes with an interest rate that remains unchanged throughout the lock-in period. A floating rate loan, on the other hand, varies throughout the tenure of the loan, depending on the rate at which the loan is pegged to.

Fixed rate loan	Floating rate loan
	SORA packages	FHR packages
Interest rate remains unchanged throughout the lock-in period	Interest rates tied to industry reference rate which is reflective of the market	Interest rates tied to bank’s fixed deposit rates which is reflective of the market
More peace of mind since the monthly repayment remains unchanged during lock in period	Less certainty in monthly repayments and need to be prepared for any changes in the monthly repayment	Less certainty in monthly repayments and need to be prepared for any changes in the monthly repayment

In Singapore, a floating rate home loan is usually pegged to the Singapore Overnight Rate Average (SORA) or a Fixed Deposit Based Rate (FDR). The 3-month compounded SORA has risen from 0.1949% at the beginning of 2022 to 3.641% as of February 26, 2024. 

Floating rates tend to be cheaper compared to fixed rate packages, which means paying a lower monthly instalment. However, there is less certainty on the repayment amount you will be paying as the rates are not fixed.

DBS provides a 2-in-1 home loan which marries both the fixed and floating rate – a part of your loan amount will be under a fixed rate package for peace of mind and having the remaing amount benefit from the interest of a floating rate package. Do note that the hybrid home loan is only for completed properties only.

Choosing between a fixed and floating rate mortgage

Ask yourself – Is the certainty of knowing how much you would be paying each month important to you? If it is, then a fixed rate loan might be a more suitable option because there would be no surprises. However, given that interest rates could fall in the next 1 to 2 years, borrowers might want to choose a shorter locked-in period for their home loan.

For others who hold the view that interest rates have peaked, getting a floating rate home loan may be more suitable. However, those who choose this option might want to set aside extra cash for buffer in case interest rates rise instead.

Before committing to a home loan package, make it a point to consider the relevant fees and conditions for refinancing or repricing. Home loan packages usually come with a lock-in period of at least 2 years. This means that you would not be able to pay down your loan or refinance to another financial institution without incurring penalty fees during the lock-in period.

Refinancing incurs valuation and legal fees which might add up to a hefty sum, so it is prudent to look at the package in totality, and not just the rates.

Tips to cushion the impact of higher mortgage repayments

1. Review your current home loan

Homeowners should re-assess the interest rate of their existing home loans and explore loan options where they can enjoy potential interest savings. You can use the DBS Home Loan Savings Calculator to calculate potential savings by repricing with your existing bank, or by refinancing with another bank.

2. Reduce your housing loan amount

If you have spare cash lying around or when you receive your annual bonus, you can consider partial repayments of your home loan to save on interest payments. Some banks may charge a fee for partial repayments, so weigh the pros and cons before you take action.

3. Use your CPF for your monthly home loan repayments

You can use the funds in your CPF-OA to service your monthly mortgage repayments, even if you are financing a private property. This can be done by submitting an online form via the CPF website.

Using your CPF funds to service your monthly loan repayments means that you will lose out on the interest earned on your CPF-OA account, which currently stands at 2.5% pa.

4. Extend your home loan tenure

Consider extending the tenure of your home loan so that you can pay a smaller monthly repayment. While this would mean paying more interest in the long run, it could be a temporary measure for the next couple of years to improve your cash flow and provide some breathing space.

The extension of your home loan tenure is contingent on the maximum loan tenure allowed - 30 years for HDB flats and 35 years for private properties on a bank loan.

5. Set aside excess funds as buffer

For those who are on a floating rate loan, you may consider putting aside more money per month into your home loan servicing account. For example, if you were previously setting aside $2,000 a month for your mortgage repayments, you may now want to set aside $2,500 instead.

Using this approach has two benefits – 1) it prepares the borrower for the possibility of higher instalments and 2) it “forces” you to set aside more as a financial buffer ($500 in this scenario).

6. Choosing an affordable home

For those buying a home, it is important to right-size their property purchase and exercise prudence. This is especially so as some economies may slip into recession, which may cause retrenchment or a period of low income.

New borrowers need to determine how much money they can borrow. The Total Debt Servicing Ratio (TDSR) has been tightened in September 2022 to cap your total monthly debt repayments at 55% of your gross monthly income. This means new mortgages cannot cause borrowers’ total monthly loan repayments to exceed 55% of monthly income.

Remember to factor in additional related payments such as property tax, property agent commissions, condo maintenance fees, insurance, home repairs or improvements, property loan interest and so on. Include other upfront costs, such as the down payment, stamp duties, cost of furnishings and any renovations.

7. Talk to a home loan specialist

It may be complicated for the borrower to compute the monthly repayments or know which loan package to pick as some published rates are not updated promptly online. It is best to speak to a home loan specialist to help you compare and compute your monthly repayments and answer all your questions.

Once you have chosen your loan package, do bear these in mind......

Just like investing in stocks or making financial decisions in general, it is wise to adopt a long-term view and be prepared for nasty surprises. Stay attuned to the latest trends and developments. Set aside emergency funds. The principle is to have enough cash or liquid assets for your monthly instalments over the next 2 years, even if you face unforeseen circumstances.

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Check out DBS MyHome to work out the sums and find a home that meets your budget and preferences. The best part – it cuts out the guesswork.

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Reach out to our home advice specialist for a complimentary Home Loan Consultation to find out which type of package suits your needs.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.