Fixed or floating rate for your mortgage?

Dear Mr Tan,

Is it better to take a mortgage on a fixed rate, or a floating rate?

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REPLY:

It depends on the terms that are offered to you. Normally, the interest rate should be pegged to a market benchmark plus a margin.

For example, the interest rate on 10 year government bond is now at 3% p.a. A fixed rate mortgage should be at 3% plus a margin of say 1%, ie 4% p.a. It should be fixed for the full term.

The floating rate should be based on the current rate of (say) 2% plus the margin of 1%, ie 3%. This interest rate should be reset every 6 to 12 months, based on the movement of the market benchmark.

At the current time, when interest rate is at a historically low level, it is better to take a fixed rate loan and pay 4% p.a (say) for the next 10 years. You do not have to worry about future changes in the interest rate, as this rate is "locked in".

Apart from any special reason (eg lock in the current interest rate), I generally prefer a floating rate. This gives the greatest flexibilty for you to re-finance the loan, to repay the loan early (when you sell the property) or to change your repayment schedule.