Over the last year or so, I received quite a handful of emails and messages from readers on the subject of home loans. I think this blog post is probably overdue.
Fixed rates are for people who want to have a higher level of certainty and are quite happy with the lock in period. Floating rates are for people who wish to have the flexibility that comes from not having any lock in period.
For example, when interest rate on my home loan spiked to 5.1% many years ago, I chose to pay down the loan for my previous home.
I was not eligible to re-finance my home loan as the quantum was lesser than $200K by then. Banks weren't interested in refinancing relatively small loans.
This was a chat I had recently with a reader:
What's the catch?
If the FHR18 should spike in these 2 years, bad luck, although it seems unlikely that it would.
What is FHR18?
The FHR18 is basically the interest rate on an 18 months fixed deposit offered by DBS. This is currently at 0.6% per annum.
So, in the above example, first year interest rate is effectively 1% and for the second year and beyond, effective interest rate is 1.8% as long as the FHR18 stays unchanged.
There are debates on whether using the SIBOR (1 month or 3 months) plus a spread is better or whether FHR18 plus a spread is better. Central to the debates is the matter of transparency with the FHR18 being the winner.
I always say that we cannot predict but we can prepare. If we are prepared, all is good. Peace of mind is priceless.
POSB HDB Loan: Peace of mind.