Navigating the world of mortgages can be daunting, especially for first-time homebuyers and new investors who are faced with an array of options, each seemingly shrouded in technical jargon. If you're in this position, fear not. In this article, we'll demystify the concept of fixed-rate mortgages and floating rate mortgages, shedding light on how they function and whether they align with your financial goals.
Fixed-rate mortgages maintain a stable interest rate, irrespective of market fluctuations. Borrowers with this type of mortgage make fixed monthly instalment payments throughout the duration of the mortgage, providing them financial predictability. In the U.S, 30-year fixed rate mortgages are the norm.
For these loans, the interest rate fluctuates in response to changing financial market conditions and central bank monetary policy rates. Borrowers with adjustable-rate mortgages witness fluctuations in their monthly payments as the market dynamics change. Adjustable-rate mortgages are often pegged to interbank rates like the Singapore Overnight Rate Average (SORA).
Calculating Fixed-Rate Mortgage Costs
When considering a fixed-rate mortgage, your primary concern is likely calculating monthly instalment payments and total interest paid. The total interest paid hinges on the loan's duration—longer terms entail higher interest costs. For example, a 10-year fixed-rate mortgage accrues less interest compared to a 20-year fixed-rate mortgage.
Calculating monthly payments can become complex due to varying proportions of principal and interest. Thankfully, numerous mortgage calculators simplify this task. If you are interested in understanding the breakdown of principal and interest payments over time, amortisation calculators are available.
Fixed-Rate Mortgages: Amortised and Non-Amortised Varieties
Fixed-rate mortgages are typically amortised, meaning each monthly payment covers both principal and interest. This structure is popular among borrowers due to its stable interest rate and fixed monthly payments.
However, fixed-rate mortgages can also be applied to non-amortised loans with varying structures. One approach involves annual deferred interest, where fixed interest accumulates annually and is paid as a lump sum at the end of the loan period. Another method entails paying only the fixed interest in scheduled instalments, deferring principal payments to a later date. Non-amortised mortgages are less common and generally unsuitable for long-term property investments.
Advantages and Disadvantages of Fixed-Rate Mortgages
Like all loans, fixed-rate mortgages carry certain risks, primarily tied to market interest rates.
Borrowers favour locking in lower interest rates to save money over time. When rates rise, borrowers benefit from stable, lower monthly payments. However, if rates decline, borrowers cannot lower their interest rates to match market conditions, resulting in higher mortgage costs than if they were on a floating rate mortgage.
Is a Fixed-Rate Mortgage Right for You?
Whether a fixed-rate mortgage suits you depend on your financial goals, time horizon, and current market conditions. If you plan to buy a home or invest in property for the long term and current interest rates are low, a fixed-rate mortgage offers predictable monthly payments and a constant interest rate. Conversely, if you're comfortable with interest rate fluctuations and varying monthly payments, an adjustable-rate mortgage might better align with your objectives, especially if you anticipate declining interest rates in the future, which can reduce your monthly payment burden.
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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.