Fixed rate vs variable rate home loans

Taking up a loan may be a life-changing call with monetary impacts that unremarkably last for many years. attributable to the big quantity of cash that's usually concerned in an exceedingly loan, the charge per unit is sometimes the best thought for loan borrowers, and justifiedly therefore.

When it involves loan interest rates, there area unit usually 2 major categories: mounted rates and variable rates.

The former remains mounted throughout the loan amount, while the latter fluctuates with market conditions.

For most loan borrowers, creating a selection between the 2 is intimidating. In fact, several don’t even trouble creating the selection and permit the banks to try and do therefore on their behalf.

But for those that would like to create a call on your own judgement, start by understanding the most distinction between mounted rates and variable rates.

As mentioned, a fixed rate home loan features the same interest rate over the entire loan period.  Say you apply for one at a rate of 5% p.a., your outstanding loan amount will be charged at an interest of 5% p.a. until the day you pay off your entire loan. There are absolutely no fluctuations in interest rate.

In Malaysia, variable rate home loans,  meanwhile, are commonly pegged to the Base Lending Rate (“BLR”) as recommended by Bank Negara.

As an example: say you hold a variable rate home loan offering an interest rate of -2.4%; based on the current BLR of 6.6%, your actual home loan interest rate would be 6.6% – 2.4% = 4.2% p.a..

However, if the BLR rises to 7%, your interest rate too would increase to 7% – 2.4% = 4.6% p.a.. Similarly, if the BLR decreases to 6%, your interest rate would lower to 6% – 2.4% = 3.6% p.a..

Interest rates for fixed rate home loans are usually higher than those of variable rate home loans, to consider possible rises of the BLR in the future.

At present, most home loan products offered by banks in Malaysia tend to be variable rate. Fixed rate home loans are more common among “non-bank” financial institutions such as AIA and ING, though they are also available (though not as aggressively marketed) in certain banks.

Many people instinctively select variable rate over mounted rate loans, since the offered rate of interest of the latter is nearly perpetually on top of the previous. as an example, associate degreed fast|a set} rate home equity credit by AIA presently has an rate of interest of 4.85% p.a., whereas a variable rate home equity credit offered by some Malaysian banks ar going at 4.2% p.a..  The mere distinction of 0.65% for a principle loan quantity of RM500,000 could be a walloping RM3,250 in total interest repayments for the primary year!

However, should the BLR rise during the loan period, the picture could change in dramatic fashion.  Say the BLR climbs up to the 8% territory (which actually happened in 1999), a person on variable rate home loan with an interest rate of -2.4% would be paying a towering interest of 5.6% p.a..  In such a scenario, the person who opted for a fixed rate home loan of 4.85% p.a. would be paying RM3,750 less interest every year.

Because there is no way to accurately predict the movement of BLR, there is also no sure-fire way to ascertain if fixed rate or variable rate is financially the better option.  Theoretically, both choices have the potential of saving you money or making you pay higher cost; and it is up to you to balance the potential benefit and potential risk involved.