Fixed vs Variable Interest Rate Mortgages
August 15, 2008 Interest Rates, Mortgages Over Malts No Comments
On Wednesday night at my bi-weekly Mortgages Over Malts I was asked a question about whether the Fixed Interest Rate Mortgage was better than the Variable Interest Rate Mortgage. Good question. The answer is that both have their own advantages and disadvantages, it just depends on what you are looking for. Read on to find out more.
The Fixed Interest Rate mortgage defines the interest rate for the entire term of the mortgage from the outset. This creates a situation that you will know exactly what your mortgage payment will be for the entire term of your mortgage (1, 2, 3, 4, 5 or 10 years). For some people this is great. They can set up their monthly budget with certainty.
The Variable Interest Rate mortgage defines its interest rate in relation to the lender’s prime lending rate. So you may have a rate where your interest is for example 0.6% below prime. The prime lending rate for all lender’s fluctuates. So one month your payment maybe $1000 but the next month is can go up to $1025 if prime goes up by 0.25%. But the prime lending rate may also go down, so you may see your payment be reduced by $25 as well.
So what is the advantage of the Variable Interest Rate Mortgage? The advantage is that typically the variable rate is lower than the fixed rate and could save you money over the entire term of the mortgage if you can handle the potential fluctuations in payments.
One important thing to note is that with the Variable Interest Rate Mortgage you can fix your interest rate at any time to the best fixed rate mortgage available through that lender. So if you don’t like where the prime lending rate is going you may fix your interest rate.
So does the stress of your payments potentially going up justify the cost savings? If yes then go for the variable otherwise the fixed is probably right for you.
Call me and I would be glad to answer any questions you may have.
All the best,
Jason