Wednesday, January 30, 2013

Mortgage - Fixed Rate vs. Floating Rate

What is a Floating-Rate Mortgage?
All commercial banks in Malaysia offering Floating-Rate mortgage, i.e. BLR - 2.2% or BLR-2.4% (depends the loan size and promotion packages).

What is a Fixed-Rate Mortgage?
In Malaysia, only AIA and ING (both Insurance companies) offering Fixed-Rate mortgage. (you are welcome to correct if I'm not so updated)

Fixed-rate, as its name, fix the rate over the term, says 30 years at 4.85% (current promotion rate) while 3 years ago it was about 5.7%.

Below are the "Advantage" of Fixed-Rate extracted from AIA's official website:-

Fixed Rate Loan offers stability by locking in at a fixed rate so your monthly installments are constant throughout the duration of the loan. Otherwise, fluctuating interest rates may exhaust your financial resources as an increase in monthly installments can be a burden especially when other costs of living are on the rise too. Although some financial institutions do not increase your installments, when the interest rate rises, the duration of the loan is extended as your installments are insufficient to cover the increased monthly interest which will eventually increase your principal loan outstanding. In AIA HOME LOAN you are in absolute control of the interest rate and installment. So, personal financial planning can be charted for a clearer financial future for you and your family.

Is it true Fixed-Rate Mortgage is better?
If you believe the BLR (Based-Lending Rate, currently at 6.60%p.a.) will eventually rises, then a fixed-rate is better.

Let's compare

Current Floating Rate, says BLR-2.2% (i.e. 6.6%- 2.2%=4.4%) vs. AIA's 4.85%.

For fixed-rate, you are paying 0.45% higher.

Unless BLR up to 7.05%, it is cheaper (rather, lower interest cost) to have a floating rate mortgage.

So, the key questions is.......will BLR up to 7.05% and higher?

AIA and ING will tell you history where BLR was up to historical high of 11%-12% (but they may not tell you that history may not and unlikely repeat itself because the financial market is very much different than those day)

Let's look at the World's Interest Trend

Countries where interest rate (fixed deposit or equivalents) is 1% or less
- Canada
- Europe
- Hong Kong
- Japan
- Singapore
- Switzerland
- United Kingdom
- United States

Countries where interest is between 1% to 3.0%
- Australia
- Denmark
- Korea
- Malaysia
- New Zealand
- Norway
- Sweden
- Taiwan
- Thailand

Ok, finally, which countries are above 3.0%?
- Brazil
- China
- Egypt
- Hungary
- Iceland
- India
- Indonesia
- Mexico
- Poland
- South America
- Turkey

Will our interest rate increases from 3% to 5% (thus BLR also increase from 6.6% to 7%~8%?)

I don't think so....