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What's the difference between fixed and floating interest rates?

Purchasing a home is one of the most significant investments that a person makes in his life. And most of the time, people consider borrowing money from banks or other financial institutions as they do not have enough money to purchase the home on their own.

The properties in most parts of the world have become expensive. No matter whether you're purchasing executive condos, HDB flats, or bungalows, you may find it difficult to finance it on your own. Sometimes, these properties cost more than a million dollars. So, if you're willing to take up the mortgage loan, you must keep in mind that you'd have to pay it off in 25, 30, or even 35 years. Therefore, you must look at the mortgage terms when choosing a lender for home investment.

There are many different types of mortgage packages offered by lenders, such as off-set mortgages, interest-only mortgages, and more. When it comes to getting a loan for purchasing a home, you must carefully understand the difference between fixed and floating interest rates.

Fixed Interest Rate

Fixed interest rate remains fixed for a specific period. And once the period is over, it will shift to a floating rate. If you want to stay safe from fluctuating interest rates, you can go for the fixed interest rates. Thus, you'd be able to reduce uncertainties to an extent. Sometimes, home buyers start regretting their decision when interest rates fall. However, you might also feel proud of your choice if the interest rates go up after your decision.

Floating Interest Rate

Floating interest rates have a direct impact on your monthly repayment amount as they are revised every month or every three months. The Internal Board Rate (IBR), Swap Offer Rate (SOR), and Singapore Interbank Offered Rate (SIBOR) are the major elements due to which the interest rates fluctuate. You must carefully decide because the company's discretion may have an impact on the IBR. On the other hand, SIBOR and SOR remain transparent. The buyers that understand the movement of interest rate must go for the floating interest rate as it can bring them a lot of benefits.

Which One to Choose?

It gets extremely difficult to decide which rate is suitable for you because you're supposed to study the market that is filled with lots of uncertainties. No matter whether you're prepared for fluctuation or not, the interest rates may go up and down due to some circumstances.

First, you must carefully analyze your financial situation and then decide whether you can afford an interest rate hike or not. You must determine whether you'd be able to plan and budget your monthly expenses or not. In simple words, peace of mind is essential. A variable SIBOR might be a suitable option for you if you have lots of spare and liquid cash.

Thus, you'd able to enjoy the benefits of the lower interest rate environment. On the other hand, you must go for a longer tenor SIBOR rate of up to 12 months if you need some degree of certainty. It might be more expensive as compared to the 1 or 3 months SIBOR. However, it's good for you if it makes you feel more comfortable and relaxed.

A fixed deposit home rate (FHR) can be a suitable option for the home buyers that want to reduce their exposure to the US market. The FHR is not subjected to constant repricing, and it offers more stability. You must also keep an eye on the duration of the home loan when choosing between different types of loans. The stability is the critical aspect you must look for when taking a longer tenor loan.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.

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