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Humanising Finance
November 2016

Looking For A Home Loan - What Factors To Consider?

With the wide array of home loan packages available, homeowners are often unsure about which type of home loan package would be ideal. The debate mainly centers around whether one should choose a fixed-rate or floating-rate home loan package.

Here is some basic information on the key differences between these two and some factors to consider before signing up for a home loan package.
Looking for a home loan – What factors to consider?
Fixed versus floating rate packages
With fixed interest rate home loan packages, you can have the certainty that interest rates will not move during a stipulated period, for example two or three years. Despite the changes in the economy or market conditions, the rates will stay at the same level. This gives the assurance that monthly instalments will be fixed and allows for better financial planning. Nevertheless, for this certainty, fixed interest rate packages are generally priced higher versus a floating rate home loan.

So if you want certainty of monthly commitments with the ability to better plan your monthly budget, and will not mind paying a premium for this, you may want to consider this option.

On the other hand, if you want to take advantage of lower interest rates and have the financial flexibility and means to take on some interest rate fluctuations, you may be better off going for a floating rate home loan (or variable rate home loan).
There are generally two types of floating rate packages:  
1. The first is pegged to an interbank interest rate such as the 3-month SIBOR (Singapore Interbank Offered Rate). The SIBOR is administered by the ABS (Association of Banks in Singapore) and is largely based on the interest rates used by banks in Singapore when lending unsecured funds to each other. Simply put, SIBOR reflects how much it would cost banks to borrow from each other.  
2. The other type is pegged to the bank's internal board rate such as the housing loan board rate, which differs from bank to bank.

Floating interest rates are generally priced lower compared to the fixed rates since the home owners have to bear the uncertainty of fluctuations in interest rates.

Packages that are pegged to interbank rates are seen as being most transparent as these are publicly available rates and a bank cannot unilaterally move these rates. Interbank rates change according to market conditions.

Packages that are pegged to the bank's board rate on the other hand are often seen as less transparent since the bank can decide to move these interest rates. As a result, home loan packages that are pegged to the bank's board rate are generally priced lower.
Other considerations
1. Loan period
You should consider how much you are willing to set aside for your home loan repayment. While taking a longer loan means you will likely end up paying more interest, it also means monthly payments are more affordable. This is important in case of any changes to your financial situation.
2. Outlook of interest rate environment
If there are market signals that interest rates are threatening to go up, then it becomes intuitive to consider a fixed rate proposition in order to secure these fixed rates for a stipulated period.
3. Lock-in period
This is generally in tandem with the period whereby rates are fixed or "promotional" (for a floating rate package) and during this period, any prepayment to your loan will come with a penalty. Hence if you have any plans to dispose of your property during this period, you may wish to take note of the potential penalty.
Financing your dream home can be a breeze. Be it financing or refinancing your home loan, Maybank offers one of the most attractive home loan interest rate packages in Singapore. Take the first step on a hassle-free journey towards your home ownership by calling our customer relationship executives on 1800 629 2265 (1800-MAYBANK) who can advise you further.
Always wanted to find out more about a finance-related issue? Email us at: corporateaffairs@maybank.com.sg
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