Fixed Rate or Variable Rate?

Thank you Anonymous for your comment, we are happy that it has been helpful in your decision to stay out of the equities market for now.

You asked a question about whether you should take up a fixed rate housing loan package or a variable rate housing loan package?

Given that you possess a portfolio of investment properties, it is important to proactively manage this portfolio like you would any investment portfolio, regardless of what asset class it may be.

What is happening when we possess investment properties? Basically, there is a yield factor and there is also a potential capital appreciation factor. We need to managed both these factors.

From a yield factor, the ideal situation would be to try and achieve a 'positive' cashflow, that is, your rental income is more than your mortgage commitments. You may also wish to take into consideration property tax, maintenance and conservancy charges as well.

The interest rate environment has been rising steadily for the past 2 years. Interbank rates for 3 month money was only 1% p.a. 2 years ago, it has risen to the current level of 3.6%. Interbank rates and deposit rates is the base rate in which banks then begin to price up their mortgage loans, car loans and personal loans.

We believe that the global interest rate environment is near its peak. The U.S. has peaked and it is looking at cutting interest rates in 2007. Europe, Australia and New Zealand may have another rate hike and then hold steady before also cutting later in 2007. Asia is a far smaller and fragmented community and therefore, has to play a 'follow the leader' approach.

We believe that the government in Singapore will begin to cut rates in the latter half of 2007 in order to help stimulate a slowing economy and to keep Singapore in the forefront of the Asian pack.

Our advice to our clients and friends is to re-price or re-strucuture your loans on a variable rate housing loan package.

Why? As all of us know, housing loan package are usually tenored on a 5 year basis. Therefore, by locking in a variable rate package, you will enjoy the benefits of the lower interest rates through time. Also, most housing loan packages have a penalty clause that is applicable only for the first 2 years, thereafter, you can always re-structure or re-price again depending on market conditions.