How Fixed and Floating Rates Work
When you take a home loan, the bank offers either a fixed interest rate for a certain period or a floating (variable) rate that can change over time. A fixed rate mortgage in Singapore typically means the interest rate is locked in for the first 1 to 5 years (common fixed periods are 2 or 3 years). After that, it usually converts to a floating rate. During the fixed period, your rate (and monthly payment) stays constant, regardless of market conditions. A floating rate mortgage has an interest rate that can move up or down, usually pegged to a reference rate. In recent years, Singapore banks have mostly offered floating rates pegged to the Singapore Overnight Rate Average (SORA), plus a spread. For example, a package might be “3M SORA + 1%”. If SORA is 1.5%, your loan charges 2.5%; if SORA rises to 2%, your loan adjusts to 3%. Some banks have other benchmarks (like a fixed deposit rate or board rate), but SORA is now the norm after the phase-out of SIBOR/SOR. In essence: fixed = stability for a few years; floating = rate can change every month or quarter. Understanding this sets the stage for weighing the pros and cons.
Pros and Cons of Fixed Rates
Choosing a fixed rate gives you peace of mind. Your monthly mortgage payments are locked in and won’t be affected by interest rate fluctuations during the fixed period. This makes budgeting easier – you know exactly how much to set aside. Fixed rates protect you from rate hikes: if global or local interest rates shoot up suddenly (as they did from 2022 to 2023), your loan rate remains at the low fixed rate for that period. The downside is that this security often comes at a slightly higher initial cost. Fixed interest rates are usually higher than the prevailing floating rates at the time you take the loan. For example, a bank might offer a floating rate of ~3.5% but a 2-year fixed at 3.8%. Essentially, you pay a bit of a premium for the stability. Also, fixed loans in Singapore usually have a lock-in period matching the fixed rate period. That means if you try to refinance or fully repay the loan during those 2-3 years, you’d incur a penalty (often 1.5% of the loan amount). So you’re somewhat committed. If rates drop significantly during your fixed period, you could end up paying more interest than those who floated with the market (and you might feel stuck due to the lock-in). In summary, fixed rates are great for those who value certainty – perhaps you are risk-averse, on a tight budget that can’t afford a spike, or you simply believe rates will rise and want to lock in a good deal now. Many first-time homeowners appreciate the stability especially in the initial years when finances are tighter due to renovation and new expenses.
Pros and Cons of Floating Rates
Floating rate loans often start off cheaper than fixed rates. When interest rates are high or expected to fall, banks’ floating packages become attractive. A big advantage is flexibility: many floating packages still have lock-in periods (commonly 2-3 years as well), but some have none or shorter ones, allowing you to refinance or switch packages more easily if a better deal comes along. If interest rates in the wider economy decline, a floating rate means your mortgage interest and monthly payments will decrease too, saving you money without you doing anything. Over a long 25-30 year loan, it’s likely you’ll see both ups and downs in rates, so a floating rate moves with the market. The obvious con is uncertainty. Your mortgage could become more expensive if interest rates climb. For example, in mid-2022, SORA was under 1% and many thought it would stay low; by 2023 it rose above 3% as global rates jumped – homeowners on floating loans saw their rates and installments increase accordingly. You need to be financially ready for such increases. There’s also the psychological factor: some people lose sleep over whether their next loan repricing will go up. With floating loans, usually the bank revises the rate every 1 or 3 months (depending on whether it’s 1M SORA or 3M SORA etc.), so you might see small adjustments periodically. If you’re comfortable with market movements, or you expect rates to drop (or at least not spike too much), floating can save you money. Historically, floating rates tend to average out lower than fixed rates over long periods, but short-term volatility is the trade-off.
Making the Decision: Which is Right for You?
Consider these factors when deciding between fixed and floating:
- Your Budget Buffer: If a $200 increase in monthly payment would strain your budget, a fixed rate might be safer for you. Conversely, if you have ample buffer and can tolerate fluctuations, floating is fine.
- Interest Rate Outlook: While no one has a crystal ball, research or consult on where rates are likely headed in the next couple of years. In a low-rate environment where rates are expected to rise, fixing a rate could save you money. If rates are historically high and projected to fall, floating might yield savings. (Remember, after your fixed period, you’ll likely revert to a floating rate, so a strategy some take is to fix during a period of expected hikes, then refinance or let it float when rates seem to have peaked.)
- How Long You Intend to Stay or Hold the Loan: If you think you might sell the property or fully pay off the loan in, say, 2-3 years, you wouldn’t want a long lock-in. A floating package with no lock-in might be ideal. If this is your “forever home” and you just want stability for planning, a fixed could be comforting.
- Hybrid Options: Some banks offer packages that split your loan into part fixed, part floating – for example, 50% of your loan at fixed rate, 50% at floating. This diversifies your risk. Not everyone knows about this, but it’s an interesting middle-ground if you’re indecisive. You could also do a shorter fixed period, e.g. 2-year fixed then floating, which is common.
- Refinancing Opportunities: Keep in mind, whichever you choose, you aren’t stuck for 25 years. Many Singaporeans refinance every few years to chase better rates. If you take a floating now and rates soar, you could refinance (after any lock-in) to a new fixed rate if needed. Or if you fixed high and rates drop after your lock-in, you can refinance to a lower floating. Working with an adviser or broker like Cashew can help you monitor the market and alert you when a good opportunity to refinance comes. In fact, Cashew’s system can notify you if there are new rates that could save you money, so you’re not in it alone.
In conclusion, there’s no one “best” choice for everyone – it really depends on your personal financial situation and comfort level. Fixed = stability but possibly higher cost; Floating = potentially lower cost but higher risk. Many first-time buyers in Singapore have recently leaned towards fixed rates due to the volatile rate hikes, at least for peace of mind in the initial years. Others go floating to take advantage of any downward movements and keep flexibility. If you’re unsure, talk to our team or use Cashew’s AI Assistant to get more personalized insights – we can even run through scenarios with you. Whatever you choose, the fact that you’re considering it carefully means you’re on the right track to making a smart mortgage decision.
Sarah Chen
