The Differences Between Fixed And Variable Mortgages

Fixed or variable - a modern homeowner's mantra. The gravity of this dichotomy was probably best realised during the recent financial meltdown. When the base interest rates hit the historic low, lenders with variable rates mortgages found themselves on cloud nine. Whether it was due to their sound financial planning or pure luck is another question. As the economic cycle continues to revolve the current status quo won't last forever and the interest rates will eventually pick up. If you are still on variable rate by that time, would you like to move with the tide?

Choosing between fixed and variable mortgages can often be boiled down to a following question: do you want a peace of mind or you have a speculative zest and don't mind a little risk? It shouldn't come as surprise to you that majority of variable lenders are people keeping abreast of market condition or being in mortgage business themselves. If you are not one of them then perhaps fixed rate mortgage is a more suitable option for you. Before you make up your mind, let us take a look at both kinds of mortgages in more detail.

It is probably wise to opt for fixed rate mortgage when the base interest rate is at a low point. What you have to do is to assess the movement of prime rate for the duration of the term which you plan to take. If you think prime rate will go up significantly then it is better to go for fixed rate mortgage. Conversely, if you think prime rate will go down, even a little, or stay pretty much the same,
then variable rate mortgage is worth considering. The obvious advantage here is that fixed rate mortgage will give you security by knowing what your payments will be each month until the end of the fixed period. However, in the event of base rate going down you can't take any advantage of this as you are tied in to your static rate.

As for variable rate mortgages, they have to be well-timed as there is certain amount of uncertainty surrounding the future rate movements. They also require more acumen and are not recommended for the first-time buyers. However, when used wisely they can reduce your monthly payments or at least keep them low compared to fixed rate mortgages. Of course, if the base rate is about to rise again you can expect bigger outgoings on your monthly mortgage statement. This is the risk you must be willing to take with this type of lending product.

All in all, depending on your circumstances and the state of the economy you should be able to form a clearer picture of what fixed and variable rates are all about. Don't rush your decisions and by all means look for a professional advice to save yourself a roller-coaster ride in the future.

This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.