Are fixed rate mortgages better?
With low Fixed Rate’s available now, this is a question that gets asked a lot at the moment, especially given the volatility of interest rates in recent years and other economic pressures. Mortgages come in two main varieties, Fixed Rate Mortgages and Variable Rate Mortgages (also called floating rate or revolving credit). Fixed rate mortgages offers security and ease of budgeting by keeping the interest rate of the loan fixed for a specified term, generally 1 to 5 years. Fixed rate mortgages are very popular in times of uncertainly or when interest rates are at historic lows.
A Variable Rate Mortgage does just that, it varies. Over time the interest rate will fluctuate and change, but is generally always higher than the cheapest available fixed rate. Variable rate mortgages offer flexibility of repayments and the ability to repay the loan quickly without penalty. The pro’s and cons of both types of mortgage are discussed below in more detail:
Fixed Rate Mortgages:
Many people like fixed rate mortgages as they offer a lower rate of interest than Variable mortgages. Whether you have to fix for a short term (6-12 months) or a long term (4-5 years) to get the lowest fixed rate depends on economic conditions. At the tiome of writing, interest rates are at historic lows internationally, so short term fixed rates are very low, while longer term rates are higer than the current variable rate. This is because interest rates are expected to rise in the future.
The two main advantages to fixed rate mortgages are
1. Being able to get the lowest possible available interest rate at the time you fix. This allows your repayments to pay the maximum amount of principal off and the least amount of interest. Lower interest rates are always desireable.
2. Knowing exactly what your repayments are for a set period of time, and how much of your actual debt willbe paid off in that time. You are also insulated from rapidly rising interest rates.
The down side is that if interest rates drop (as they did recently) you will not be able to take advantage of them until your fixed rate term expires, unless you are willing to pay and Early Repayment Adjustment or “break fee”. These fees can be very significant, so you should always find out about any ERA’s before breaking a fixed rate mortgage. Fixed rate mortgages offer stability and predictability at the cost of flexibility.
Variable rate Mortgage:
Variable rate mortgages offer a level of flexibility that fixed rate mortgages do not. Firstly you can make lump sum repayments any time you want. A variable rate mortgage acts like big overdraft, so you can freely pay it off as quickly as you like with no penalites. If you get a bonus at work, win some money or come into an inheritance for example, you can put them money directly onto the principal debt with no penalty.
Secondly you can change from a Variable mortgage to a fixed rate mortgage any time you like – at no charge. This can be very handy if you expect interest rates to rise in the near future and want to lock in a good rate while they are still available.
Thirdly you can draw back against your loan in the case of an emergency. If you’ve aggressively paid down your variable mortgage but suddenly need to get back some of them money you’ve put on it – you can. While not recomended, it is a safety blanket many people like.
Finally, Variable rate mortgages can actually end up cheaper than fixed rate mortgages. If you fixed your mortgage for 3 years at say 7%, and a year into the term interest rates fall sharply – as they did early in late 2008 and early 2009 – you will not be able to take advantage of these lower rates until the remaining 2 years of your fixed term have passed, by which time interest rates may well have risen again. Not so with a variable Mortgage.
Sounds great, but there is a down side. As mentioned earlier the Floating rate at any given time is usually more expensive than almost all fixed rates. Also, while you can benefit from falling interest rates, you are also at the mercy of rapid interest rate increases. Variable Rate Mortgages provide you with flexibility but at the cost of generally higher interest and unpredcitability.
So, of the different types of Mortgage, which is right for me?
That really depends on your personal situation and income. If you have a set income and like to budget well, fixed is a good way to go. If you have a commision based or variable income, floating may be more your style.
One important thing to remember is that you can have BOTH types of loan at once. It’s possible to have part of your loan fixed and a part ona variable rate. This gives you the best of both worlds in many ways, but the proportions are important. Split facility mortgages – sometimes refered to as 80/20 loans because of the relative proprtions of fixed rate mortgage and variable mortgage – provide a mix of the advanatgaes of both types of mortgage. Most of your loan is on a fixed rate, so rapid increases in interest rates will not affect you much, while you still have some of the flexibility provided by a variable mortgage.
Talk to your lender or broker about the advantages of a split facility. In most cases there is little point in having your whole mortgage on a variable rate, you would probably benefit more from having at least part your mortgage on a fixed rate.
In all cases however, you should be aware that everyones situation is different. Fixed rate mortgages might work for your friend up the road, and an entirely variable rate mortage may work for your brother in law, but what works for YOU may be very different.
Get some advice from a professional, look closely – and honestly -at your budget and financial commitments, then make your decision a Fixed Rate Mortgage may not always be best. More information and up to date articles can be found at www.nomortgage4u.com and http://homeloanmortgagemortgagerefinance.com.