Are you interested in buying a property in Hong Kong? If you are, then you need to know the difference between a fixed and floating interest rate.
Home buying is a monumental step because it is one of the most expensive purchase that you will ever make. This is why home loans are widely used in this transaction. It is very hard to come up with a cash amount that will help you pay for your new home. And if you have your eyes specifically set on buying a house in Hong Kong, you need to find a way to minimize the costs you will spend.
According to the data published by the Global Property Guide, Hong Kong properties are among the most expensive in the world. In fact, the UBS Real Estate Bubble Index revealed how overvalued the properties are. Not this data is not meant to discourage you from buying a home in this region. It is meant to encourage you to find a way to lower your home loan interest rates.
Why is there are a focus on the interest? First of all, this is something that can help lower the overall amount that you will pay for your house. The interest amount is always in proportion to the loan value. If you can lower this rate, then you can lower the interest amount that will be added into your mortgage payments.
If you cannot lower the value or selling price of the property you wish to buy, there is something that you can do to save through the home loan interest rates. It all begins with understanding the two types of interest rates in Hong Kong: fixed interest rate and floating interest rate.
What is the difference between a fixed or floating interest rate
The main difference between the two relies on who will bear the risk of interest rate fluctuations in the market. The interest rate in the financial sector rise and fall over time. When it goes up or down, it will affect the payments of the borrower or the profits of the lender – depending on the type of interest you will choose for your mortgage.
Fixed interest rate
In a fixed interest rate, the risk is given to the lender. Borrowers of home loans with a fixed rate will take on the current rate when the loan was approved. Even if the rate in the market goes up, the lender will shoulder the cost of that change. The borrower remains untouched by the changes in the home loan interest rates because their payments will be based on the same rate when their home loan was approved. At the same time, the lender will win if the market rates end up going down because the borrower will be paying more. Because the risk is with the lender, most of them do not allow a fixed rate for the whole payment term – usually only about 3 to 10 years and then it becomes a floating interest rate home loan.
Floating interest rate
In a floating interest rate, the risk is given to the borrower. This is why lenders usually make this a bit lower than the fixed interest rate. Also known as the adjustable-rate or variable interest rate, the home loan payments will be based on the current rate in the market. There are two options when it comes to the basis of the floating interest rate: the Hong Kong Interbank Offered Rate or HIBOR rate and the Prime rate. Among the two, the HIBOR rate is the one that changes more frequently. This is why some lenders allow HIBOR-based home loans to be renewed.
Ask your lender about this option before you choose this type of interest rate for your home loans. When it comes to the Prime rate, this is the best lending rate in the market that can be offered by financial institutions. This is usually set by the Hong Kong Association of Banks.
How to choose between a fixed and floating interest rate
Now that you know the difference between a fixed rate and a floating rate home loan let us discuss how you can make a smart choice between the two. Ideally, you want to choose the lowest rate that you can get. But you should also try to consider other facts.
According to the Hong Kong Monetary Authority, there is an increase in HIBOR-Rate home loans compared to fixed rate mortgages. Obviously, home buyers do not mind taking on the risk of interest rate fluctuations.
But how can you determine which is the right type of home loan interest rate for you?
You need to look at the housing market and try to determine if the rates will rise or fall in the coming months or years. Experts usually come up with forecasts. If you think that home loan interest rates will go down, then by all mean, opt for the floating interest rate. But if you know that it will rise, go for the fixed interest rate.
You should also consider your income. If you know that your salary will rise in the coming years, you can opt for a floating rate because it is lower compared to fixed rate loans.
In the end, thorough research, an observant eye in the housing market and a complete understanding of your finances will allow you to get the best interest rate for your home loan.
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