To help you out in deciding which interest rate to opt for, we have mentioned the pros and cons of fixed and variable mortgage interest rates. When you consider getting a mortgage loan to purchase a property, the most important thought that keeps racing inside your mind is whether to opt for a mortgage loan with fixed-rate or go for one with a variable interest rate. At this point, the correct advice for you will be to go for the option which best suits your needs and circumstances. This will help you decide the correct rate mix for your mortgage loan.
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First of all, let’s see what these interest rate types are. A fixed-rate is one that is certain for a fixed term. On the other hand, a variable rate may change over time and may be less at the time when the loan is settled but may see fluctuation later on. Many times, borrowers fix the interest for a part of their mortgage loan, and the remaining is given a variable interest rate. Overall, a big chunk of the loan borrowers choose the variable interest rate for mortgage loans but this does not necessarily mean that it is the best rate type for every borrower. To help you decide which rate type is best for you, we have mentioned the pros and cons of fixed and variable mortgage interest rates.
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Variable mortgage interest rate
Pros
- Flexibility in Loan Repayment: You get a wide diversity of repayment options when you opt for variable interest rates for loans. You also get an option to pay off your loan quicker since there are no incurring interest rate break costs. You may also get features like accounts or a redraw facility that can help you cut down the loan balance on which the bank charges the interest; still, you get to access the surplus funds.
- Option to refinance: Variable Interest Rates also give you a scope of switching to some other mortgage loan lender or home loan product since you don’t get the break costs.
- You may have to pay back less: There are several occasions when loan lenders reduce the interest rates of the loan; this may be in order to cut down the funding costs. Whatever be the reason, you directly benefit from it and have to repay less if you have chosen a variable interest rate.
Cons
- If the interest rate rises, you have to pay more: Similar to reducing the interest rate, lenders also have the right to increase the variable interest rate at any point. In such as situation, you will have to pay more repayments than what you were paying previously.
- Uncertainty in Cash flow: Since the interest rates are bound to change at any time, it is not possible to forecast the cash flow for the long term as a borrower. This also means that a variable interest rate demands more flexibility from the borrowers’ side. To ease the cash flow issues, you can use the offsets and redraw facilities in case of any unforeseen circumstances.
Fixed mortgage interest rate
Pros
- No worries about rising interest rates: If you think that the interest rate is low at this moment but may rise in a couple of years, you can go for a fixed rate as it may save you from paying more repayments in the future. But there is a catch in this situation, the rate for which you might apply for the loan may not be the same rate for which you will settle later on.
- Choose and forget: When you lock your interest rates, you don’t have to worry about repayments as it remains the same throughout the period for which the loan is borrowed. This may typically last for 1 to 5 years. This way you know about your repayments and chalk out your budget keeping it in mind.
Cons
- Rigid loan type: When you opt for a fixed interest rate, you do not have the flexibility to repay the loan faster. This is because it does not allow additional payments and you cannot cap it at a certain loan amount.
- Break fees: If you want to refinance the loan, sell off your property or pay off the loan in one go before the loan tenure ends, you need to pay a considerable amount of break fees.
- No benefit from rate cuts: If you opt for fixed interest rates, you’ll not benefit if your lender decides to cut down the home loan rate for the long term.
Conclusion
These are the most obvious pros and cons of the fixed and variable mortgage interest rates and you can choose between the two depending on your situation. If you want to pay off your loan faster, then it is better to go for a variable rate but if you want a predictable mortgage loan type, fixed-rate is the one for you.
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