Should I choose a fixed-rate or floating-rate home loan?

The decision between a fixed-rate and a floating-rate home loan is one of the most important choices you will make when financing your property purchase. Each option comes with distinct advantages and trade-offs, and the right choice depends on your financial circumstances, risk tolerance, and outlook on interest rates.

A fixed-rate home loan locks in your interest rate for a specified period, typically two to five years. During this period, your monthly instalment remains unchanged regardless of what happens to market interest rates. This provides certainty and makes budgeting straightforward. Fixed-rate packages are particularly attractive during periods of rising interest rates, as they shield you from increases. However, fixed rates are generally set higher than prevailing floating rates because the bank is absorbing the interest rate risk on your behalf.

A floating-rate home loan, on the other hand, has an interest rate that adjusts periodically based on a reference rate, most commonly the compounded SORA. Your monthly instalment can go up or down as the reference rate changes. Floating-rate packages typically offer lower initial rates compared to fixed-rate options, which can translate to significant savings during periods of low or declining rates. The trade-off is unpredictability: if rates spike, your monthly payments could increase substantially.

Many borrowers opt for a hybrid approach. Some banks offer packages that start with a fixed rate for the first two or three years and then transition to a floating rate for the remainder of the tenure. This gives you stability in the early years when you may be adjusting to the financial commitment of a new property, followed by the potential cost savings of a floating rate.

When evaluating your options, consider the overall interest rate environment. If rates are historically low and expected to rise, locking in a fixed rate may be prudent. If rates are high and expected to decline, a floating rate could save you money as your payments decrease over time.

It is also important to look beyond the interest rate itself and consider the full package terms, including the lock-in period, early repayment penalties, legal subsidy for refinancing, and any claw-back clauses. Cashew's mortgage advisors can help you weigh these factors and compare packages across banks to find the most suitable option for your situation.