When it comes to fixed or variable mortgage, more and more people are opting for fixed rates instead of variable rates because they offer stability and peace of mind in a volatile housing market. That said, there are pros and cons to each type of rate.
WHICH IS BETTER, FIXED OR VARIABLE MORTGAGE
You may know the difference between a fixed mortgage or variable mortgage, but do you know the advantages and disadvantages of each one? And do you know which rate best suits your needs?
In this guide, we look at the pros and cons of variable and fixed rate loans and also look at why more and more people seem to be opting for fixed rate home loans these days.
VARIABLE MORTGAGE
Advantage:
Flexibility is definitely the biggest asset of a variable rate. You don’t need to worry about penalties if you want to increase your monthly mortgage payment, pay off your mortgage early or switch to another lender and you could also benefit from falling interest rates (if your lender responds to them).
Cons:
Variable rates do not offer stability or predictability, which means that you are at the mercy of changing rates. Yes, your rate could go down over the term of your mortgage, but it could still go up!
Changes in rates are difficult to predict and a lot can happen during a 20 or 30 year mortgage term, so you could put yourself in a financially vulnerable position by opting for a variable rate.
FIXED MORTGAGE
Advantage
Fixed-rate mortgages provide certainty, and that can be worth a lot to many home seekers.
Mortgage repayments tend to be the largest monthly expense for most households, so knowing exactly what you will pay each month for a fixed period of time can give you peace of mind and really help with the budget..
Disadvantages
If you lock into a fixed rate for, say, 10 years, there is a chance that interest rates will fall during that time, leaving you stuck paying more than you would have otherwise. Another drawback of a fixed mortgage is that you can be affected by penalties if you want to increase your monthly payments at any stage.
If you receive a lump sum and want to use it to reduce a portion of your mortgage, you may also be charged an “additional financing fee” for doing so.
These rates do not apply to variable rate mortgages. However, some banks now allow you to make an overpayment of up to 10% of your balance. pending each year without being penalized.
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Similarly, you may be charged an interruption fee if you switch banks or switch to a variable rate with your existing bank before your fixed rate period ends.
Basically, if you are committing to a fixed rate, it may only be worth it if you are willing to stick to that rate and pay it back for the agreed term.
Fixed rates, particularly those over five years, are also typically more expensive than variable rates, as you are paying the additional costs associated with fixing the payment over multiple years. In general, the longer the fixed term you choose, the higher the interest rate, so the higher your monthly refund will be.
SET OR VARY?
Whether you choose a fixed mortgage or a variable mortgage, it will ultimately come down to several things, such as:
- The value you place on stability and predictability
- If you think you will want to increase your monthly payments sometime in the near future.
- If you think you will want to pay a lump sum on your mortgage at some point in the near future.
- If you want to change your mortgage at some point in the near future.
WHY MORE PEOPLE CHOOSE FOR A FIXED MORTGAGE?
The real estate market has been through a remarkably volatile and unpredictable period, and many believe that we are still years away from achieving reliable stability. This could explain why more and more borrowers are opting for the certainty of a fixed mortgage.
Another reason could be the recent price of fixed mortgages by banks. As mentioned above, fixed rates are usually higher than variable rates; The trade-off for the slightly higher rate initially is that you know it won’t change over a period of time.
However, in recent times, some of the best rates on offer have been flat rates, which is unusual by international standards. As a result, fixed-rate mortgage holders are getting peace of mind, stability, and better value, so it’s not surprising that more and more people are choosing a fixed rate.
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BEFORE YOU DECIDE, ALWAYS COMPARE!
Getting a mortgage can be a very stressful and interesting time. Choosing between a fixed rate or a variable rate is one of the key decisions you will have to make and it is important to have all the information available before committing.
However you look at it, choosing the rate at which to go is going to be a bet. Property prices and global interest rate trends are very difficult to predict, But by knowing the value you place on certainty and peace of mind, you’ll be in a good position to decide whether to set or vary your repayment rate.
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