Fixed Rate vs. Variable Rate Mortgages: Which Is Better for You?

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage offers borrowers a set interest rate for a predetermined period of time, usually from one to five years. This means that the monthly mortgage payments remain consistent throughout the fixed term, providing predictability to the borrower. 

Key Features of a Fixed Rate Mortgage:

• The interest rate remains unchanged for the agreed period

• Monthly repayments are consistent

• Often available for terms of 1, 3 or 5 years

What is a Variable Rate Mortgage?

So, what is a variable rate mortgage? A variable-rate mortgage has an interest rate that changes over time, depending on market conditions and benchmark interest rates. This type of loan can be beneficial if rates decrease because monthly repayments would decrease, but it also carries the risk of increasing payments if rates rise.

Key Features of a Variable Rate Mortgage:

• Interest rate changes periodically based on market conditions.

• Monthly repayments can increase or decrease.

• Influenced by central bank rates and economic trends.

Key Differences Between Fixed and Variable Rate Mortgage

In this section, we consider the key differences between a fixed-rate mortgage vs a variable-rate mortgage. Understanding these differences can help you decide, should i choose a fixed or variable-rate mortgage.

Benefits of Fixed Rate Mortgage

The potential benefits of a fixed-rate mortgage include: 

• Stability: Knowing your exact monthly payment helps with budgeting.

• Protection from Rate Hikes: Market fluctuations won’t affect your repayment amount.

• Long-Term Planning: Ideal for homeowners who plan to stay in their property for a long time.

Drawbacks of Fixed Rate Mortgage

However, the drawbacks of a fixed-rate mortgage can be: 

• Higher Initial Rate: Fixed interest rates are usually higher than initial variable rate mortgage rates.

• Early Repayment Charges: Some lenders impose penalties if you pay off the loan before the term ends.

• Limited Flexibility: You can’t take advantage of lower interest rates without refinancing once locked in. 

Benefits of Variable Rate Mortgage

Having understood what is a variable rate mortgage, its crucial to consider the potential benefits, which include:

•  Lower Initial Rates: Often starts with a lower interest rate than fixed mortgages.

• Potential for Savings: If interest rates decrease, monthly payments reduce.

• More Flexibility: Switching mortgages or repaying early without heavy penalties is easier.

Drawbacks of Variable Rate Mortgage

On the other hand, the potential downsides of a variable-rate mortgage can include: 

• Uncertainty: Monthly payments fluctuate, making budgeting more difficult.

• Rate Increase Risk: If interest rates rise, repayments will increase

• Potential for Higher Costs Over Time: Although the initial rate is lower, long-term costs can increase.

How to Decide Between Fixed Rate & Variable Rate Mortgage?

Choosing between a fixed rate mortgage vs variable rate mortgage depends on personal financial goals, risk tolerance, and market conditions. Here are key factors to consider:

Risk Tolerance

• If you prefer stability and predictability, a fixed-rate mortgage is the safer choice.

• If you're comfortable with some financial risk and potential savings, a variable-rate mortgage may work better.

Current Market Conditions

• If interest rates are historically low, locking in a fixed-rate mortgage can be beneficial.

• If rates are high but expected to drop, a variable-rate mortgage could save money in the long run.

Your Financial Situation

• A fixed-rate mortgage ensures peace of mind if you need predictable payments due to a fixed income or tight budget.

• A variable-rate mortgage might offer savings over time if you have financial flexibility and can handle fluctuations.

Economic Trends

• Interest rates fluctuate based on economic conditions. Fixing a rate might be safer if rates are volatile due to economic uncertainty.

• If economic indicators suggest a rate drop, a variable-rate mortgage could be a better bet.

Conclusion

Deciding whether to choose a fixed-rate mortgage a variable-rate mortgage depends on your individual needs, market conditions, and financial plans. If stability and predictability are your priorities, a fixed-rate mortgage can be the best option. On the other hand, if flexibility and potential cost savings appeal to you, a variable-rate mortgage might be better. 

Ultimately, deciding should i choose a fixed or variable-rate mortgage is not a decision you should make alone. With such a significant financial decision, consulting a mortgage advisor is highly recommended. Not only can they tell you whether you should choose a fixed-rate or variable-rate mortgage, but they can also help you secure the best interest rate and get your pre-approval.  

For expert guidance and all your questions answered, speak to an Engel & Völkers mortgage advisor today.