Fixed vs. Variable Interest Rates: Which Is Right for You?
Choosing between fixed and variable interest rates is a key decision for any mortgage borrower. Each option has its own set of pros and cons, and the right choice depends on your financial situation, risk tolerance, and future plans.
This quick guide will introduce you to the differences between these two types of interest rates and help you understand the implications of each option, so you can decide which is best for you.
Fixed Interest Rates
A fixed interest rate mortgage offers stability and predictability, but has some drawbacks too:
Advantages of Fixed Interest Rates
Stability: With a fixed-rate mortgage, your interest rate remains the same throughout the loan term. This means your monthly mortgage payments are predictable and won’t change, making it easier to budget and plan your finances.
Protection: Fixed rates protect you from future interest rate increases. If market rates rise, your rate stays the same, potentially saving you money over the long term.
Certainty: Knowing exactly what your payments will be for the entire loan term provides predictability and peace of mind, especially if you have a tight budget or fixed income.
Disadvantages of Fixed Interest Rates
Higher Initial Rates: Fixed-rate mortgages often have higher initial interest rates compared to variable-rate mortgages. This means you might pay more in interest, especially in the early years of the loan.
Less Flexibility: If market interest rates fall, you won’t benefit from the lower rates unless you refinance your mortgage, which can involve additional costs and fees.
Variable Interest Rates
A variable interest rate mortgage offers flexibility but comes with potential risks. Here’s what you need to know:
Advantages of Variable Interest Rates
Lower Initial Rates: Variable-rate mortgages often start with lower interest rates compared to fixed-rate mortgages. This can result in lower initial monthly payments.
Potential Savings: If market interest rates decrease, your interest rate and monthly payments could go down, saving you money.
Disadvantages of Variable Interest Rates
Uncertainty: Your interest rate can change periodically, typically in relation to an index or benchmark rate. This means your monthly payments can increase or decrease, making it harder to budget and plan long-term.
Risk of Rate Increases: If market interest rates rise, your rate will also increase, potentially leading to higher monthly payments and increased overall interest costs.
Complexity: Variable-rate mortgages can be more complex, with terms that might be harder to understand. It’s important to fully grasp the details of how and when your rate can change.
How to Choose Between a Fixed and Variable Interest Rate Mortgage
Your Financial Stability: If you have a stable income and can handle potential fluctuations in your monthly mortgage repayments, a variable rate might be suitable. But you prefer predictable payments, a fixed rate is likely a better choice.
Your Risk Tolerance: How comfortable are you with financial uncertainty? If you’re risk-averse, a fixed rate provides more security. If you’re comfy with some risk for potential rewards, a variable rate might work for you.
Market Conditions: Consider the current and expected future interest rate environment. If rates are historically low and are expected to rise, a fixed rate can lock in those low payments. If rates are high and expected to fall, a variable rate might offer you savings.
Loan Term: How long do you plan to stay in your home? Variable rates can be advantageous if your planning to sell or refinance before the initial fixed period ends.
Need help deciding which type of mortgage is right for you?
Contact our mortgage brokers - we’re here to provide unbiased support, and the only goals we’re focused on are yours.
Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.