Thursday, April 16, 2015

Fixed or Variable Rates for Home Loans?

In recent months, there has been a lot of news on interest rates and indeed the rates are changing at a much faster pace than before. Interest rates on the international level are all changing. US interest rates are changing, Singapore's interest rates are changing too.

With the ongoing changes, now it’s a good time to look at the benefits or disadvantages of both fixed rates and variable rates for our loans.Most of us will be taking loans when we buy a house. When interest rates change, we will get affected, big or small, depending on the home loan packages we take.


In Singapore, there are basically 2 typical types of home loan packages offered by the banks. The first is short term fixed interest rates and the second is variable interest rates or SIBOR dependant rates. Interest rates are generally low in Singapore so a lot of people go for variable rates packages. But we have to take note that if interest rates rise, the monthly instalment we pay will go up as well.

If you own properties or is planning to buy properties in countries like Australia, the situation is different. Some of the fixed rate packages in Australia actually have lower rates as compared to the variable rate packages for a short period of time. It is important to do our own research to get the best deals when buying properties in Singapore or Australia. Newcastle Permanent is an independent, mutual, retail financial service provider which provides home loan packages in Australia.

Let's take a look at some of the benefits and disadvantages of fixed vs variable rates.

Fixed Rate Home Loan

A fixed rate home loan can provide you a sense of financial certainty because the interest rates and repayments will remain the same for the set period of time of your choosing.

  • Consistent monthly payments
  • Best for long term loan payments
  • For home-owners who expects interests rates will go up and would want to lock in a lower interest rates now
  • Protection from interest rate hikes

  • Monthly payments are higher than Variable rates
  • Home-owners cannot take advantage of any interest rate decreases that might occur during the life of the loan
  • Most plans incur a fee when breaking out of a fixed rate before end of the loan term. This happens when there is transfer of home ownership due to sale or refinancing over to another lender.

Variable Rate Home Loan 

With variable rate home loan, market forces and the economic climate affect the amount of interest you pay for your mortgages. 

  • Monthly payments are cheaper than fixed rate loans
  • Best for those who plan to keep the loan for a short period of time

  • No protection against interest rate changes
  • Monthly payments will fluctuate in line with market interest rates

What happens when interest rates change?

$500,000 loan on 5 year fixed rate

If we take a $500,000 loan at 5 year fixed rate, we will not be affected when interest rates increase,. However, when interest rates decrease, we can't take advantage of it. 

$500,000 loan on variable rate

If we take a $500,000 loan at a variable rate in Australia, the variable rate loan will adjust accordingly if interest rates increase and we'll be affected. If interest rates decrease, we can take advantage of it and our monthly repayments will be adjusted lower. 

1% increase on a $500,000 loan

If interest rates increase by 1% on a $500,000 loan package for a 25 years term, the monthly repayment would increase by around $295. Those on the fixed rate package will not be affected while those on variable rates packages will be affected by this rise in interest rate. 

There you have it, the benefits and disadvantages of fixed vs variable rate home loans. Choose your loan packages wisely and you could save quite a bit of money on your monthly home loan instalments. 

*This is a sponsored post by Newcastle Permanent


  1. There is one new concept promote by certain Bank. Coined the term FHR which i find interesting and only unique to it and seems quite popular.

    1. Hi Cory,

      I did a quick check and seems like DBS does have this FHR which you said. They explained it as the average of DBS Bank‘s prevailing 12 month and 24 month Singapore Dollar fixed deposit rates for amounts between S$1,000 to S$9,999 or such other sum as we may specify. From the looks of it, it should be more stable than the 3m SIBOR rate. Certainly can consider that as well.