Fixed rate vs variable rate home loans: Which are better?

Taking up a home loan is a life-changing decision with financial impacts which commonly last for decades.  Because of the large amount of money that is often involved in a home loan, the interest rate is usually the greatest consideration for home loan borrowers, and rightly so.

When it comes to home loan interest rates, there are generally two major categories: fixed rates and variable rates.

The former remains fixed throughout the loan period, whilst the latter fluctuates with market conditions.

For most home loan borrowers, making a choice between the two is daunting. In fact, many don’t even bother making the choice and allow the banks to do so on their behalf.

But for those who wish to make a decision on your own judgement, start off by understanding the main difference between fixed rates and variable rates.

The Difference between fixed rate and variable rate home loans

As mentioned, a fixed rate home loan features the same interest rate over the entire loan period.  Say you apply for one at a rate of 5% p.a., your outstanding loan amount will be charged at an interest of 5% p.a. until the day you pay off your entire loan. There are absolutely no fluctuations in interest rate.

In Malaysia, variable rate home loans,  meanwhile, are commonly pegged to the Base Lending Rate (“BLR”) as recommended by Bank Negara.

As an example: say you hold a variable rate home loan offering an interest rate of -2.4%; based on the current BLR of 6.6%, your actual home loan interest rate would be 6.6% – 2.4% = 4.2% p.a..

However, if the BLR rises to 7%, your interest rate too would increase to 7% – 2.4% = 4.6% p.a.. Similarly, if the BLR decreases to 6%, your interest rate would lower to 6% – 2.4% = 3.6% p.a..

Interest rates for fixed rate home loans are usually higher than those of variable rate home loans, to consider possible rises of the BLR in the future.

At present, most home loan products offered by banks in Malaysia tend to be variable rate. Fixed rate home loans are more common among “non-bank” financial institutions such as AIA and ING, though they are also available (though not as aggressively marketed) in certain banks.