Variable Rate Mortgage vs. Fixed Rate

Image result for fixed vs variableThere has always been a debate about variable and fixed rate mortgages. Fixed rate mortgages do not usually have the same type of risk as floating rate mortgages, but both tend to cost more than the alternative. It’s hard to decide what to do.

Do you often take risks? Do you prefer to keep things safe and pay a little more for a kind of insurance policy? Obviously, it is advisable to consult your lending institution for the best option for you, but in the meantime, it would be easy to make an appointment for a mortgage application with some basic knowledge about your pricing options.

When you make your mortgage payments, you make payments on principal and interest as well. With a fixed rate mortgage, you make the same payments every month for principal and interest. It is possible that banks offer different fixed rates, but still very similar. The fixed rate is determined by the economy and the prime rate (central rate of bank loans) at the time of your loan. It is fixed, which means that all those who have applied for a fixed rate mortgage will have the same rate. When you are bound by a fixed-term contract (usually 1, 3 and 5 years) the interest rate will not change according to all economic factors. These rates are ideal for individuals who are budgeted in advance and will not be able to make different payments each month. However, they will probably end up paying more interest. On the economic side, with a fixed rate mortgage, you can already predict an increase in interest rates in the coming years.

On the other hand, with a variable rate mortgage, it is possible to save money in the long run unlike the case of the fixed rate. The variable mortgage rate fluctuates with the prime rate of the central bank. The central bank adjusts the prime rate according to various economic factors. This means that the interest rate on your mortgage can change, given the fluctuation of the prime rate. So, if a budget is not absolutely necessary and there is more room to take certain risks, a variable rate may be the right option.

It is important to know that you are not completely constrained and limited to the type of rate you choose for the duration of your mortgage unless you believe that you can repay it within a number of years. It may be interesting for you to use a mortgage calculator to get a better idea of ​​how you fit in with these changes. Depending on the length of time you decide to use (usually 1, 3 or 5 years), you can renew your loan and try another type of rate. For example, if your money is limited when you get your first mortgage and you need to constrain yourself to a strict budget for the future, you can opt for a 3-year fixed rate mortgage.

Unless you have a stroke of luck and win the lottery or have a very high-paying job, it is very likely that you will not succeed in repaying your entire loan in 3 years, however, the possibility of having more flexibility is very big. Perhaps during those years, you received a salary increase or were able to repay more and take the risk that includes the variable rate. As mentioned earlier, if you opt for the floating rate, you may save more money compared to a fixed rate, but you will probably have to pay even more depending on the rate of preference from the central bank. It is a risk that you must be ready to take.

Whatever the rate you choose, it will have to fit well with your financial lifestyle; If your financial situation allows you to take risks, the adjustable rate mortgage could be the right option for you. If you do not want to take a risk and you prefer to make the same monthly payments each month, then go for a fixed rate mortgage. In the end, no matter what choice you make between a variable rate mortgage or a fixed rate mortgage, the bank will help you make the right decision for you.