a. Floating rate package (inclusive of SOR or SIBOR pegged loans)
b. Fixed rate package
Answer: b
Why?
Banks want to secure their bottom line. You might think you are getting some form of security in going for fixed rate, when actually, this is also true on the other side of the fence, the bank also gets secured income for as long as the lock-in period you have signed up for, right? And banks being banks, you can be sure that they have done their math to make sure they don’t lose out, meaning, what they offer you is what they think the interest rates will be capped at (and more) within the time frame you are locked-in. Say a bank offers you a 2 years lock-in fixed rate package whereby the rates are 1.5% first year, 1.6% second year (by the way these are REAL rates and these are quite low), that probably means that the bank is predicting that interest rates will stay an average of 1.55% over the 2 years loan period. Of course, the bank is taking a risk of losing out in case interest rates actually go up a lot more (but banks can’t be stupid right?). As a borrower, you are also taking a risk! Most people probably have the mentality that a fixed rate package is “safe”. This is true in the sense that you will not be paying more than the fixed-rate you have signed up for. But at the same time, you would have already signed up the risk of paying more than you have to. To illustrate, assuming your loan amount is 300K. Every 0.1% being added to the interest rate means you are paying $300 more per year. There are many who will avoid risk at all cost. For this group of people, fixed-rate is the way to go. But for the rest who are willing to take some risk, do include floating rate packages in your consideration.
Since banks are probably more interested in selling you their fixed-rate package, guess which package comes with more incentive to their sales staff? If you encounter sales staff who try to hard-sell you the fixed-rate package, you should just walk away. Quite frankly, i am saying this because i just had such an encounter. As a customer, you have the right to choose whatever package you want. Don’t be swayed by what you are told, do your own math! The simple formula is this: Interest Rate in Percentage ÷ 100 X Loan Amount = What you will be paying in 1 year. Let me re-iterate this, every 0.1% more could be very significant.
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