Variable Rate Mortgages: The Pros And Cons

If you’ve been trying to buy a house you may have noticed there are a lot of numbers to consider: the price of the house, your savings, the amounts of deposit and monthly payments you can afford, as well as a host of other figures and fees. Trying to find a mortgage that meets your needs is another numbers game, but this one can work in your favour.

You may not realise it, but there is great variety available to home buyers shopping around for a suitable mortgage. Different banks, brokers and other lending institutions all offer their own mix of short-term and long-term mortgages, as well as both fixed rate and adjustable rate mortgages.

So how do you know which combination is the best for you? That depends on your circumstances.

Fixed rate mortgages allow you the security and stability of knowing that your mortgage interest rate will not fluctuate with market conditions. This means that if interest rates spike, you will be protected. Conversely, if interest rates drop, you will not be able to take advantage of the potential savings without transferring your mortgage to another institution or making other possibly complicated arrangements. There is a cost obviously to this security as normally fixed rate mortgages are higher than variable rate mortgages.

Variable rate mortgages are different than fixed mortgages in that the interest rate you pay on the outstanding principal of your loan fluctuates according to changes in the market place.  Normally as  result of central bank / ECB interest rate changes. There is a certain amount of risk involved with a variable rate mortgage in that you may end up paying more money in the long run if interest rates rise and stay high. You also have the potential to take advantage of savings if interest rates fall or stay low.

An additional bonus to variable rate mortgage is the lower initial interest rate. You may be risking higher or unstable payments, but you are rewarded with a lower interest rate when your loan is at its fullest point. Unless interest rates rise dramatically, this advantage is likely to save you more money than if you had chosen a fixed rate mortgage.

There are advantages and disadvantage to securing a variable rate mortgage loan. However, you may find it worthwhile if you intend to pay off a large portion of your outstanding balance early into your loan period. By doing so, you reduce the bulk of your loan while paying the initially lower interest rate. A variable rate mortgage may also be the best choice for you if you anticipate greater future income or if you intend to pay off the entire mortgage loan quickly – again due to the lower initial interest rate. Even if rates were to increase early into your mortgage period, the fluctuation would unlikely be so great that it negated the difference in interest rates between a fixed rate and a variable rate.

To reduce risk, an option to consider is arranging with your lender to have the ability to convert a variable rate mortgage into a fixed rate mortgage at a designated time. You may pay a fee for converting your mortgage, but if you find yourself in a situation where interest rates are rising rapidly, it may be worthwhile to stabilise your payments and balance by switching to a fixed rate plan.

As always, before making an offer on property, speak to your financial advisor to find a mortgage plan that fits your budget and your needs.  The agent may require proof of having a mortgage in place before accepting an offer on a property.

Comment below to share your thoughts on variable versus fixed rate mortgages.  We'd love to know what your experience has been.