Debt Solutions

A fixed rate housing loan for 20 years looks attractive.  If you are getting a house for your own use and don't foresee paying off the debt within three to five years, a fixed rate housing loan is an option for your debt solution plan.  However, is a fixed rate housing loan for you? 

Well, it is depends on how you view your earning capacity in the future and if it takes more than 10 to 15 years to settle the loan, then it would be better to fix the interest rate and protect yourself from future fluctuations in interest rates.  

On the other hand, if your financial position is expected to improve in the future and you foresee paying off the loan in 5 years, then a loan with a floating rate may be a better choice. 

For those who are buying property as a source of rental income, a fixed rate loan is advisable as you lock in your cost of funds, allowing you to project your future rental income. 

However, if the rate of return from the property is lower than the fixed rate, then you should sell the property.  With a floating rate, you won't know how much your interest cost will be. 

If the value of your home has increased, you may want to sell it for other purposes.  For instance, if you bought a house for $250,000 and financed it with a bank loan and the value of the house then increase to $400,000, you may consider refinancing the house with a fixed rate.  Then you can pay off the loan and invest the balance in another asset that offers a higher return or use the money as capital for your own business. 

Since the rate is fixed, you know exactly what your monthly installments are, so, if you earn more than that, it goes into your pocket.  Knowing for sure how much you will be paying in interest not only gives you peace of mind but also allows you to plan your finances well.  Another good reason is the hedge a fixed rate provides against interest rate fluctuations. 

When the interest rates are going up and down inconsistently, your monthly installment could effectively double.  During the financial crisis, some people lost their homes when rates went up. 

However, if you can pay off the loan in less than seven years, then you should go for variable rates.  A floating rate housing loan offers flexibility in prepayment because you can pay more whenever you have extra income, which you can use to pay off the principal.  A prepayment is still possible with a fixed rate housing loan although there are conditions applied. 

For properties under construction, there is no point in just paying the interest, instead you can pay extra to settle the principal faster. 

However, not all properties qualify for fixed rate housing loans.  Some bankers are selective, especially in new property developments. 

In conclusion, when choosing a refinancing facility, make sure that the plan suits your income and budget.