Being a prudent mortgage shopper, it’s natural for you to look out for the best rates around. In this context, you might land up in a dilemma, wondering whether you should go for a fixed or variable rate.
While variable rates remain popular, an increasing number of property buyers are deciding to go with fixed rates these days. The stability and mental peace that they enjoy from such rates are the key reasons behind this decision.
Visit this site to get an idea about the latest rates in the mortgage market. By consulting with the experts, you can make an informed decision.
What Are Fixed Rate Mortgages?
The rate of interest remains the same through the overall tenure of fixed-rate loans. This implies that you would be shelling out a constant cost for borrowing the money throughout the duration of the loan. Market fluctuations won’t be affecting the rate of interest. When you choose a fixed rate for a mortgage, the monthly payments that you make become standardized.
When it comes to property mortgage loans, homeowners generally go for fixed rates for 30 years. This allows homeowners to budget and plan their finances. If you have tight yet stable finances, it would be wise to opt for fixed-rate mortgages. This would secure you against the chances of interest rates soaring, which would make the loan expensive.
What Are Variable Rate Mortgages?
In the case of variable-rate mortgage loans, the interest rate is subject to adjustments due to market changes. This implies that you may have to shell out a greater or lower amount of money each month, depending on the fluctuating rates.
Historical statistics reveal that the interest loans for variable rate loans are lower than those with fixed rates. The reason is, customers often find them to be a riskier alternative. If the interest rate keeps rising after you borrow the money, you would have to pay more interest over the loan period. However, you can also benefit when the rate of interest drops. If you can afford to risk this, you can go for variable mortgage rates. If you are someone capable of paying the loan off quickly, it would be logical to go for variable loans.
Caps On Interest Rates For Variable Rate Mortgages
With variable mortgage rates, the borrowers remain exposed to the risk of benchmark rates rising too high. Therefore, most of these rates come with an upper limit or ceiling that secures the borrowers. However, these caps are often fixed at high levels. Therefore, by default, the rates tend to increase in case there is any significant market fluctuation. This explains why many homeowners opt for fixed-rate loans. These loans warrant affordability on a long-term basis.
In most variable-rate mortgages, the cap on interest rate structure is divided into three distinct caps. The first one states the maximum amount that can be initially charged by the rate. Then there’s a periodic cap that determines the rate that may change during the period of adjustment. Lastly, you have the lifetime cap, which determines the highest point to which the rate might rise.
Which Is Better: Fixed Interest Rate or Variable Rate Loan?
Fixed Interest Rate: Pros
- You have a greater certainty of how much you need to shell out with fixed-rate mortgage interest rates. For most households, the repayments for mortgages happen to be the biggest concern every month. Fixed mortgage rates significantly facilitate your budgeting.
- The rates of interest remain fixed throughout the tenure of the loan. Regardless of how high the rates increase after a few years, you need not worry once you lock the rates.
Fixed Interest Rate: Cons
- Suppose you lock the rates for 30 years in a fixed-rate mortgage. After ten years, the rates start falling. You would remain stuck at the higher rates of interest, which you would not have to shell out had you gone for a variable mortgage rate.
- Fixed-rate mortgages have another drawback, as the borrowers need to shell out a hefty penalty if they want to increase the monthly repayments.
Variable interest rate: Pros
- In case the interest rates decrease after a few years, you can reap the benefits.
- The best thing about variable interest rates is their flexibility. If you want to close the mortgage earlier by making larger monthly payments, the banks will not impose penalties. Eventually, you can also switch to a different lender.
Variable Interest Rate: Cons
- It’s difficult to predict whether the rates would rise or fall after a few years.
- If the rate of interest increases, you can face a financial burden.
Comparing Fixed And Variable Mortgage Rates
Depending on your financial strengths and market conditions, you need to choose between fixed and variable rate mortgages. Historical trends reveal that over time, homeowners end up paying lower amounts of interest with variable loans. However, these trends do not necessarily reveal how the next couple of decades are going to be for borrowers.
As a homeowner, you also need to take the amortization period into account. The longer the period, the more impact you would bear from changes in rates of interest.
It makes sense to consult a professional or specialist to understand the market trends. If you are comfortable with variable rates, the experts would recommend whether or not you should go for the same. Besides, you would find professional advice valuable while choosing your mortgage lender. This would ensure minimal penalty if you decide to close the mortgage earlier, along with the least rates of interest.
Read Also: An Ex-Pats Guide to Mortgages in Singapore