Why I took a 2.95% fixed rate mortgage in 2023? Instead of floating rate mortgage? (as a Singapore Investor)

In a recent article I shared that I recently refinanced my mortgage to a 2.95% fixed rate mortgage.

Some of you have reached out to ask about the thought process, and why I picked that mortgage option.

So I figured I would share how I arrived at my decision in this article.

Hopefully it may help some of you out there, who are choosing between a fixed vs floating rate mortgage right now, and the lock in period.

Mortgage options available

To share, these were the mortgage options available, after speaking to a mortgage broker.

I have split them up into Fixed Rate and Floating Rate mortgage options below.

Note that depending on your loan amount and situation, you may have a different set of mortgage options.

It’s usually best to get a mortgage broker who can help check across all the banks and propose the best options (saves you a lot of time contacting each back).

If you already have a mortgage broker you can use your contact.

Otherwise you can try Redbrick, and I extract their details at the end of this article.

Fixed Rate Mortgage Options available

These were the best fixed rate mortgage options available when I was refinancing:

 In picture form below:

 3M Compounded SORA is 3.744% today.

So the floating rate in Year 2 of the 1 Year Fixed Rate option would work out to 4.19% for the second year (based on today’s rates).

Floating Rate Mortgage Options available

This was the best floating rate mortgage option available:

In picture form below:

3M Compounded SORA is 3.744% today, so the floating rate would work out to 4.24% today.

How does the 3M Compounded SORA move over time? For Singapore mortgages?

For reference, this is the 20 year chart of 3M compounded SORA and how it moves over time.

You can see how current levels of 3M SORA is higher than even 2007.

While it sits at 3.744% today.

Most of the past 10 years when interest rates were at zero – the 3M SORA was at 0.2%

How to pick between fixed and floating rate mortgages?

Now the general rule is that you pick a fixed rate mortgage if you think interest rates are going up.

And you pick a floating rate mortgage if you think interest rates are going down.

But you have to realise the banks themselves are not stupid.

If everyone thinks that interest rates may be headed lower.

You can bet that the bankers know that we think that too.

Why I took a 2.95% fixed rate mortgage in 2023? Instead of floating rate mortgage? (as a Singapore Investor)

So the problem with taking a floating rate mortgage today.

Is that the 3M Compounded SORA is 3.744% today.

The floating rate is a 0.50% spread on top of the 3M Compounded SORA.

That’s an interest rate of 4.24%.

Way, way higher than the fixed rate of 2.95%.

Interest rates need to fall A LOT for floating rate mortgages to make sense

Let’s say 3M Compounded SORA falls to 1.5% 1 year later.

That means for the second year of the mortgage you are paying 2.0% (1.5% + 0.5% spread).

That means an average of 3.12% for the 2 year fixed term.

Which means that you were better off just taking the 2.95% fixed for 2 years.

The risk with floating is what if interest rates don’t go down

The risk with floating rates today is that yes, everybody thinks interest rates are going down in 2024.

But what if you’re wrong?

What if interest rates stay at this level for the next 2 years?

Then suddenly you’re stuck paying 4.24% for 2 years, when you could have locked in 2.95%.

Floating Rate Mortgages – Bird in hand vs two in the bush?

So the big problem with floating rates in my view, is that you are paying a premium today, for the hope that interest rates will come down enough in the next 2 years, to create an average interest rate that is lower than the fixed 2.95% rate.

It’s a bird in hand, vs two in the bush kind of logic.

And while I personally think interest rates are coming down, I’m much less certain on whether they will come down enough to justify paying a higher upfront interest rate.

So between fixed and floating rates, I chose to go with fixed rates.

Bird in hand vs two in the bush?

I rather go with the bird in hand.

How to pick between Fixed Rate mortgages?

Between the fixed rate options, it was down to the two below.

Both with a 2 year lock-in period.

I could either get 3.05% fixed for the first year, and floating for the second.

Or I could get 2.95% fixed for two years, with the right to reprice after the first year.

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How does free mortgage conversion work?

After a bit of discussion with the bank / mortgage broker, and some googling.

I finally pieced together how the free mortgage conversion works.

Basically if you take a 2 year fixed rate mortgage at 2.95%.

After the first year, you can ask the bank for a free mortgage conversion.

The bank will then give you a couple of options you can choose from.

For example:

• A fixed rate at x%, or
• A floating rate at 3M Compounded SORA + x% spread.

Of course, because you are still in lock-in period, you wouldn’t expect the options to be as good as if you were a new customer / out of lock up.

But if interest rates plunge over the next 12 months for example, and new fixed rate mortgages are going at 1.5%, you could probably get the bank to give you something in the 1.6% – 1.8% range.

So that’s my understanding of how the free mortgage conversion works – but please do correct me if you have a different understanding.

Why I took a 2.95% fixed rate mortgage in 2023?

With that in mind this became quite a simple decision for me.

I picked the 2.95% fixed for 2 years, with the free conversion after 1 year.

Worst case if interest rates stay high for the next 2 years, I am protected because I am locked in for the 2.95% for 2 years.

Whereas if I had taken the floating rate in the second year, I would have sleepless nights if interest rates shot up a year from now.

And with this option, if interest rates do go down in the next 12 months.

I can get a free conversion into either a fixed or floating at the time.

2.95% fixed for 2 years is pretty cheap all things considered

2.95% lock up for a 2 year mortgage, frankly it wasn’t as bad as I expected.

Considering that Singapore Savings Bonds were paying 3.4% just a month or two back.

I could literally have taken the mortgage, put my spare cash into SSBs, and earn the 0.45% spread risk free.

With latest T-Bills paying 3.73% risk free, mortgage rates still remain below the other yield options.

A reminder that despite the huge rise in interest rates, real interest rates actually remain quite manageable.

And with the Fed pivot now and possibly lower interest rates in 2024.

It would be interesting to see what happens next with the economy.

But… there’s no right or wrong here

So that’s how I settled on my mortgage option.

But I do want to stress there is no right or wrong here.

You may decide to go with a floating rate, and if interest rates plunge in the next 6 months you could well look like a genius.

There are pros and cons with each option.

And considering all the facts I know about the macro environment, and my own risk appetite, this was the option I settled for in the end.

I encourage investors to think through the same for yourself, and decide what works for you.

Mortgage Brokers are worth it if you’re looking to refinance / take a new mortgage

Whatever the case, I have found that it’s usually worth it to get a mortgage broker if you are looking to refinance / take a new loan.

The mortgage broker can easily help you check on the most competitive rates available to you – based on your age, loan amount, and financial situation.

It sure beats having to approach each bank individually to check on the rates.

They don’t come at any additional cost to you too, they earn from the referral fee paid by the bank.

If you know any mortgage brokers you can just use the ones you’re familiar with.

Otherwise you can try Redbrick, and I extract their details below.

There is a tool you can use to check on the rough ballpark latest rates (it’s not super updated, so best to still contact the mortgage broker for latest rates).

You can leave your contact details below, and the broker will reach out to you to suggest possible options.

Full disclosure that this post is NOT being sponsored by Redbrick. Views in here are my own.

This article was written on 22 Dec 2023 and will not be updated going forward.

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