Floating vs Fixed Mortgage Rates: Which One Should You Choose When Interest Rates Are Rising?

When applying for a mortgage (KPR), one of the most decisive choices you must make is the type of interest rate: fixed or floating. Many buyers choose based on the lowest number listed in a brochure — but that approach is risky. Choosing correctly requires understanding how each type of rate works and how it fits, or doesn't fit, your specific financial situation.

What Are Fixed and Floating Rates in a Mortgage?

Fixed rate is an interest rate locked at a certain figure for an agreed period. You know exactly how much your monthly installment will be, regardless of what happens in the macro economy. Banks generally offer fixed rates for the first one to five years, after which they automatically convert to a floating rate.

Floating rate — or variable rate — follows a benchmark interest rate, usually the bank's internal prime rate, which correlates with the BI Rate. This means your installment can go up or down throughout the loan tenor. Banks typically review it periodically, every three or six months, and adjust your installment according to current market conditions.

The most common mortgage product in Indonesia is a combination: a fixed rate for the first few years, usually lower as an incentive, followed by a floating rate afterward. Understanding when and how this transition happens is essential before signing the loan agreement.

The Real Risks of Each Rate Type

The risk of a fixed rate isn't in the number itself — it's in the missed opportunity. If market interest rates fall significantly while you're still in the fixed period, your installment doesn't fall with it. You're locked into a rate higher than it needs to be, with no mechanism to benefit from better market conditions.

The risk of a floating rate is much more intuitive: when the BI Rate rises — as has happened recently — your mortgage installment rises too. If the increase is significant and prolonged, the impact can seriously strain household cash flow, sometimes for quite a long time.

• Floating is low-risk if: your income grows over time, you have an adequate financial buffer, and the interest rate cycle is trending downward.
• Floating is high-risk if: your income is relatively fixed, your installment is already at the limit of your repayment capacity, and the macroeconomic conditions are in a period of uncertainty.

When Does a Fixed Rate Make More Sense?

A fixed rate is more suitable for you if:

• You're taking out a mortgage while interest rates are trending upward, as is currently the case, and want to protect yourself from further increases over the next few years.
• You have a stable income but little room for fluctuation in your monthly household budget.
• You're in the early stages of your career or starting a family, where certainty in installment amounts is critical for short-term planning.
• You have no psychological tolerance for uncertainty — an installment that can change is a real source of stress for some people, and the value of this certainty should not be underestimated.

One important note: the promotional fixed rate listed in brochures is usually only for the first year or two, after which it jumps sharply to the floating rate. Always ask what the floating rate will be after the fixed period ends, and use that figure as the basis for your long-term installment simulation.

A Combination Strategy Rarely Discussed

There are two options that banks often don't actively promote but are worth asking about:

First, an interest rate cap on floating products. Some banks offer a ceiling on how far the interest rate can rise on their floating products. This offers an appealing combination: you get flexibility if rates fall, but protection from extreme increases. Ask directly: "Is there a mortgage product with a rate cap or ceiling?"

Second, an aggressive repayment strategy during the fixed period. Take the fixed rate for the first three to five years, and use that time to aggressively pay down a portion of the principal. With a smaller remaining principal when you move into the floating period, the impact of a rate increase on your monthly installment is far more limited — even if the rate rises significantly.

Rule of thumb: don't compare mortgage products based solely on the fixed rate. Compare the total installments for the first five years plus an estimate of the installments for the following five years using conservative assumptions for the floating rate. A bank offering a low fixed rate but a very high floating rate could end up more expensive overall than a bank with a higher fixed rate but a more competitive floating rate.