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Floating Rates for Mortgage Loans, still the right options?

When it comes to mortgage loans, we have a lot of financing options. But the question is: Which one is the best for us?

The answer depends on several factors, including the type of loan we want and how long we plan to hold onto it.

With 11 years of experience under his belt, Alvin Lock has worked with the most prestigious local and international financial institutions in Singapore. His expertise lies in retail and private banking space, including investment advisory, legacy planning and property loans. In this article, he explains what “floating rates” are and whether they’re still a good option for today’s home buyers.

Home buyers and property investors should consider floating rates if:

  • They have a certain level of understanding for financial markets in interest rate trends,

  • They are of the view that floating rate options can offer potentially significant savings compared tofixed-rate loan packages, and

  • There are suitable features available within floating rate options to help them better manage their loans.

When a potential home buyer, or property investor chooses a floating rate option, their interest rate will not be fixed for at least, the first 2-3 years. Instead, it will change in accordance with the reference rate that is pegged to the package, in addition to a spread or margin, to form the total loan rate.

Since many of these reference rates are either highly correlated to other rates in the global market, or are subject to change at the bank’s discretion, they tend to provide significant interest savings during a typical downturn market but can increase rapidly when prices in general are rising, such as the current global inflationary climate that we are all experiencing.

Should the latter occur, home buyers must be prepared to stomach higher interest costs and still be able to afford their higher monthly loan repayments as a result of the rise in interests, and property investors alike must be prepared that their return on investments and cash flows may be adversely affected as well.

These are the common reference rates found in today’s financing packages:

  • SORA Rate: Average rate of overnight Singapore dollar borrowing transactions by banks in Singapore. It is a highly transparent rate and has a correlation with the US federal reserve interest rates.

  • Fixed Deposit Linked Rate: This is the same interest rate that banks pay their fixed deposit customers for certain deposit amounts and tenures.

  • Board Rate: Simply a bank managed rate, and the bank has full discretion on how and when they want to change it.

Source: Alvin Lock. Alvin has enjoyed extensive success with more than 11 years of experience and track record in Retail and Private Banking. His core expertise encompasses a full spectrum of wealth management services including Investment Advisory, Portfolio Management and Financing, Margin Trading, Legacy Planning, and Property Loans.

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