Which is Better? Fixed Interest Rate vs Variable Interest Rate for your Home Loan?

This is the question that I have asked myself many times before I even purchased my first property. I did do some research on what was the available options before I decided. Depending on the different countries, the loan details may vary slightly but the main core product is basically whether it is loan that is tied to either a fixed or a variable rate of interest. Either way, this is the cost of maintaining the loan.

An important point to consider is to look at the historical chart of the interest rates in your country vs where the rate is now. This would give you an overview or a snapshot that may assist you in your decision making process on which rate is more suitable for you. In an example, when I was about to purchase my 1st property which about 2004 about 11 years ago, the base rate minus the variable rate was one of the lowest in the historical chart of rates.

The fixed rates were not readily available by many banks at that time as only insurance companies like AIA and ING offered such fixed rates. The fixed rates usually came with compulsory insurance that had to be taken against the property. It would be a disadvantage if you did not want to take this insurance.

The variable rate was a rate that would take the base rate and either minus or add to the base rate and this will ne the variable rate. An example would be if the base rate was 6.4 minus 2, the variable rate would be 4.4 percent. The base rate is usually controlled by the central bank of the country and this may vary according to the government thus, the name variable rate.

As for fixed interest rates, every month, the repayment would be a fixed amount for the rest of the tenure period of the loan, for example a payment of RM1000 for 30 years. This allows the owner of the property to have a safety net where rate increases by the government would not affect the owner’s bottom line. However, a fixed rate is usually higher then a variable rate, therefore the owner maybe loosing out on additional profits just because of having a safety net that may be more costlier in the long term.

So which rate did I decide on? At that time since the rate was one of the lowest, I decided to take the variable rate. It would take some considerable amount of time before the rate would reach the highest point therefore I wanted to take advantage of this point. Furthermore, if the rate would change, I could pass on the increase to the tenant via rental increases by either increasing the rental at yearly anniversaries or via new tenants with newly increased rentals.

So there it is, my view on what I feel is the best among the two. It may or may not be the choice that you may want to take as it depends on your risk appetite that you have. Do let me know what you think or the experiences that you have had with this by dropping your comments below.

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