Fixed Or Mortgage Variable Rates – Deciding What Is Best For You
If you are planning to buy mortgage to purchase a property, you will have to make a fundamental decision. You will need to decide whether to go for mortgage variable rates or fixed rates. Borrowing money for property purchase can be tricky. You can be bombarded with advice and information and be confused by the plethora of choice. Deciding about the kind of mortgage is probably the biggest decision you will have to make here. Considering this, it makes sense to know about both these fixed rate mortgage and variable rates in detail.
What Is Fixed Rate Mortgage?
In a fixed rate mortgage plan, the interest rate for the loan amount remains fixed. This rate is decided at the time you take the mortgage. At that time the term for which the rate will be valid is also decided. The term can be one to five years. The market rate may naturally go up in this time, but this increase will have no impact on you. But, if the market rate goes down, you will not benefit either as you will still have to make the payments at the high interest rate because you have a fixed plan. The main advantage of a fixed plan is that, you can know in advance how much you have to pay, and can plan and budget accordingly. Those who are looking for consistency and not mortgage variable rates usually prefer these plans.
What Are Mortgage Variable Rates?
This is just the opposite of fixed rate mortgage. In this case the interest that you will have to pay will depend on the market conditions and the fluctuating rates. Based on the market conditions and demand and supply, the lending companies will decide and change the rates from time to time, and all such changes will impact you. When you sign the contract, this will be mentioned in your document including the rate at that time. But if there is an increase, you will be charged more, and if there is a decrease, you will be charged less. So, the mortgage variable rates will keep changing from time to time.
If you have reason to believe that the mortgage rates will come down in the future because of increased competition, then this could be the better option. After all, why pay more on interest, when the rates in the market are low?
Properties can cost a lot of money and so the mortgage loan will be spread out into several years. Sometimes the repayment has to be made over twenty years or even longer. Naturally this is a really long time, and so you can expect that the mortgage variable rates will change several times. Sometimes they go up from your base point and sometimes they come down. But over a period, these changes ultimately even out.
Should You Go For The Fixed Plan Or The Variable Plan?
Remember, occasionally you may be able to save money when you are on the variable plan, but at other times, you should be ready to make extra payments. What will work the best for you depends on your financial condition, and also on your propensity to take a risk.
It might be a better idea to select short terms for your variable plan. For example, let us assume that you have to repay the mortgage in twenty years and that you opt for a variable rate plan at the beginning. Why not select a short plan for a period of five years within which you agree to repay according to the rate change? Then once these five years are up, you can take stock of the situation to find out whether you gained or not. If you find that a fixed plan might be better for you, you can ask to be switched to that for the next term of five years. Most lenders will agree to this switch, as long as you are committed to pay back the mortgage amount.
There’s one more thing that you will have to consider. With the passage of time as you have made several payments, the outstanding amount will reduce. So it makes sense to switch over to mortgage variable rates after a few years. This is because, since the outstanding amount is less, any hike in the rate will mean that the impact will be less on you. Yes, you might not save that much too when the interest rate drops, but you can at least avoid having to pay extra when the mortgage variable rates increase.
The Plan You Choose Also Depends On Your Age
What you decide should also depend on your age. What this means is that, if you are young, you have many working years ahead of you, and you can expect your income to grow for a long time. And as your income grows, the impact of repayment will be lesser on your overall monthly amount. The fact is that most young couples prefer to opt for the mortgage variable rates plan.
On the other hand, if you are advanced in age, and do not intend to work for twenty more years, then you will probably have to make the repayments from your savings. In such a situation, it might make sense to know in advance how much you have to repay every month. This helps to budget according to savings.
Your decision should also depend on your profession. There are some booming sectors in the economy, and if you are in one of them, then you may not worry that much about having to pay extra. On the other hand, if you are in one of those sectors that are conservative, then your approach should be traditional in your mortgage rate selection, as well. However, things can change quickly. A sector that is booming today may not do so two years later when you will still have to repay the mortgage. Keep this factor in mind.
Deciding about the mortgage variable rates or the fixed rate is a crucial decision. Never be hasty when you are making the decision. Remember, you must repay. Talk to experts, get advice, and give it serious thought before making up your mind.