When deciding which loan package to choose, additional features and important clauses embedded are often overlooked. Here are some current features (again at the time of this writing) available in some floating rate packages which may be helpful and suitable when managing our loans:
Shorter Lock-In Period:
Some current floating rate packages offer short lock-in period of only 1 year, as compared to the longer period required for fixed rate packages of at least 2, if not 3 years.
A shorter lock-in period will allow us to have more flexibility to decide after the expiry of the period on what we would like to do for our loan and property. This is ideal for clients who have near term plans of wanting to sell their property, or would like to pay down on their loan, or to restructure the loan or the ownership of the property, or simply have the freedom and option to decide the next best option for their refinancing, without having to pay a hefty penalty if they were to be otherwise still stuck in a lock-in period.
Free Conversions: Most packages for both fixed and floating rates, do come with a free package conversion to entice owners to keep their loans with their existing banks. However, some floating rate packages go one step further to offer free conversion anytime during lock-in period, or the conversion is available for use once the loan rate rises.
This can serve as a reprieve for some of us who may wish to change our mind and switch to something else available at that time. If a more suitable package comes up within the free conversion offers, such features will enable us to benefit from these opportunities.
Interest Offset Accounts:
Such accounts, if available are features within certain floating rate packages (never for fixed rate packages), will allow a portion of our cash deposits to accrue at the same interest rate as our floating rate package. The interests accrued will then be used to offset part of the loan interest chargeable. Therefore, more of our monthly instalments can then be re-channelled towards paying down on our outstanding loan amount.
In essence, our effective total loan rate will be lower as a result of the offset. How much lower this effective rate will be, depends on how much deposits and for how long we can hold them in such accounts.
That said, there is usually no holding period for the deposits in an interest offset account. Hence, there are no fees, no penalties, and no minimum deposit amount required to maintain these accounts.
Very ideal for business owners, or investors, or anyone who simply has some cash or deposits pending future deployment or use, that’s otherwise sitting inside a low interest-bearing savings/current account now.
Conclusion: So Fixed or Floating Rates?
It’s harder to try and predict the future now than ever before, but it’s important to be aware of how interest rates affect the cost of your mortgage and other loans. Floating rate loan packages are options we should consider when financing our home purchases or refinancing our existing mortgages because we can potentially keep our monthly payments low and pay much lesser interest than as compared to fixed rate alternatives. However, these may depend on our market views, and actual market conditions that can influence interest rate movements and behaviours, and our understanding on how the many different packages are available, together with additional features, can best serve our financing purposes.
Source: Alvin Lock
Alvin has enjoyed extensive success with more than 11 years of experience and track record in Retail and Private Banking. His core expertise encompasses a full spectrum of wealth management services including Investment Advisory, Portfolio Management and Financing, Margin Trading, Legacy Planning, and Property Loans.
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