Categorized | Finance

Fixed Versus Variable Rate Mortgages

It can sometimes be rather confusing knowing which mortgage will be the best for you. There are a lot of things that you should know before taking on out and one of the basic decision is whether to choose a fixed or variable rate.

Fixed Rate

A fixed rate mortgage offers a selection of advantages. You will be paying a consistent amount each month and this will help you to know exactly how much you will need. You may be able to find a rate that is good enough that it is cheaper than a variable rate. Normally the rate will be higher but if the variable rate goes up during the term of your fixed rate then you will be doing well. However, there is the chance that interest rates may go down. Then you will not be able to take advantage of the reduction as you are fixed. Many fixed rate mortgages will tie you in so that you cannot change provider during the fixed rate period and therefore if there are better rates around you will not be able to take advantage of them. You may even be tied in for a period once the fixed rate ends where you will have to move on to the standard variable rate which may not be a good one.

Variable Rate

A variable rate may change when the base rate goes down, which means that there is a chance that you will be able to be paying even less. A fixed rate will not change and so will not be able to take advantage of this. Variable rates tend to be less than fixed rates, although over the term of fixed rate, it could work out cheaper. You will not always pay the same amount of money each month. If the variable rate changes then so will your repayment amount. This is great if the payment goes down but if it goes up, you may find it difficult to manage to pay it.

It can be rather a gamble as to which to choose. If you think that interest rates will fall, then you may be tempted to take the variable rate as it could go down, although the lender may not necessarily lower the rate even if the base rate goes down. If you think that the rate will go up then a fixed rate could be better. This is because it will not go up with the rates and therefore you will gain. The fixed rate can also be helpful if you are on a tight budget as you will know that it cannot go up for a certain period of time.

An alternative to these two types of mortgage is a tracker mortgage. This will move with the base rate and so is fantastic when rates are falling. However, if rates rise it will be sure to rise as well. These will have a charge from the lender added on to the base rate and so it is important to find a competitive one.

About Author
Crystal is a Finance blogger who occasionally writes on business and finance, She religiously follows ratesupermarket to find out information on Ontario mortgage rates.