Planning is crucial, unless there is a real need for variable payments, I don't see why one would choose to pay higher interest rate in favor of the lower interest rate offered with the fixed payment plan.

When is there a need for variable payment? this is what I think:

1) Those that might have the capacity to pay back the bank in the short term. He will be able to repay back the bank loan in full without much penalty as compare to the regular payment scheme.

- It depends on when is the period that can afford to do a full redemption, if that is more than 6 months, perhaps a fixed payment lower interest rate plan is more economical.

2) Those that might lose their job (income) and don't have the ability to pay the fixed monthly installment. He will be able to take even a installment holiday, at a cost of higher interest rate or some nominal admin charge.

- As long as you keep a buffer reserve cash of about 3 to 6 months of installment, you will have that much of buffer for you to get out of financial difficulties should you face one.

- There are other ways to get some financial support such as a short term loan, or borrow from close friends/relatives for the few months installment that you'll need. The interest incurred for such a short term loan could be less than the interest difference between the fixed and variable mortgage scheme.

Remember that mortgage loan amount is big, and a small percentage increase in the interest rate translate to means a substantial amount of cash from your pocket.

That's my 2 cents thoughts.

For long term plan, fixed is always better than variable.
Vaiable plan, the bank will increase the rate according to market and inflation.
Fixed plan, in short term we may be paying more than others, but consider just the inflation alone, ten years ago
3 room flat may only cost $80k but today $200k.
Inflation can kills.

Elly
Based on my experience, I think I wld prefer a fixed interest payment, simply becos I can't understand enough how the bank works. Somehow I have got this feeling, when the bank come knocking on your door and ask you to swtich to another plan and said it's a better plan, i.e. pay less interest, but pay more principal, it's all rubbish. I remember at that time, interest was pretty low, but later it shot up. I ended up paying a bigger amount throughout the remaining years. I think we can't beat the banks. They are always out to make money out of you. Also, I think it is better to pay off some prinicipal once we have accumulated a certain amt of cash, to reduce the loan amount. Nothing beats a debt free home. I am refering to commercial loans. But if it is CPF loan, I will just leave it as CPF loan interest is cheaper than bank interest.

Seems like the consensus is pretty much on fixed rather than variable payments for mortgages. Note, however, that fixed payments in Singapore usually don't extend beyond a couple of years. The usual arrangement for fixed interest packages designates the first few years with fixed interest and the rest as variable pegged to SIBOR rate. Thanks to everyone who joined in the poll, please look forward to the next one this week.

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