Difference between Fixed and Floating Rate Mortgages
Understanding mortgage loan rates are crucial for home-buyers in search for the most favourable packages. In applying for a mortgage loan, home-buyers will have to pick between fixed rate and floating rate mortgages. The main difference between the two is mostly determined by the stability or variability of the interest rate you have to pay. A quick overview of the two types should clarify most confusion between fixed and floating rates.
What are fixed rate mortgages?
Fixed rate mortgages, just as their name suggests, are mortgages that are set or locked to a specific percentage. Aside from having a locked interest rate, fixed rate mortgages will also have a lock-in period of typically 3 to 5 years.
During this period, the amount of interest you pay for your mortgage loan stays the same. If your mortgage lender offers, for example, a fixed rate of 1.7% for your loan, that will be the percentage of your principal that you will be paying off monthly for 3 years. It should be noted, however, that after the lock-in period, fixed rate mortgages acquire floating interest rates.
What are floating rate mortgages?
Floating rate mortgages, on the other hand, are mortgages whose rates fluctuate according to conditions in the home loan market. Unlike fixed rate mortgages, floating rate mortgages have the option of no lock-in periods, depending on the lender. Though all floating rate mortgages have fluctuating interest rates, they do not fluctuate equally or at the same rate.
Floating rate mortgages are differentiated from each other by how frequently the interest rate will change during a loan period. The most common variability are 1-month, 3-month, 6-month, and 12-month fluctuations.
Fixed rate vs. floating rate mortgages
Now, it is time to go over the suitability of each one to home-buyers.
Fixed rate mortgages are best for home-buyers looking for stability and little risk. They are most ideal when interest rate forecasts indicate a rise or when the borrower is using cash to make interest payments.
Fixed rate mortgages are ideal for those who want to be certain about the amount of interest they are paying monthly. Because of this, fixed rate mortgages have a tendency towards higher rates in comparison to floating rate mortgages.
On the other hand, floating rate mortgages are a premium for borrowers who can financially sustain the fluctuating home loan market conditions. Their volatility is what attracts certain borrowers to floating rate mortgages. The opportunity to save big with the fall of interest rates is there for floating rates.
Aside from that, floating rate mortgages are also suited for home-buyers making partial prepayments or loan repayments through CPF and for borrowers who are familiar with the workings of the home loan market. A trend indicating the fall of mortgage interest rates is also good sign to opt for floating rate mortgages.
Now that you know the difference, you can better choose which type to choose for your mortgage. For all other things you want to know, you can always ask your friendly consultants at Suite Capital. Contact us today!