Variable vs Fixed Mortgages – What’s the Difference?

The decision on whether to go for a fixed mortgage offer or a variable rate mortgage isn’t always an easy one. It is vital that you understand the pros and cons of these rate types before committing, as the impact on your finances can be significant.

What Is A Fixed Mortgage?

Also known as a fixed-rate mortgage, this is a traditional form of your loan, that has the interest rate that remains consistent for the entire term of the mortgage. In other words – once you have signed off and locked in, the interest rates do not change even though market conditions might fluctuate.

What Is A Variable Mortgage?

A variable-rate mortgage is a form of an adjustable-rate loan. This is where the rate of interest that you have to repay may fluctuate over time in either direction. It can be based on set conditions by the lender, market and even other economic conditions.

It may be noted as well that the variable rate mortgage may be fixed for an initial period in the life of the loan. After that period has expired, the interest rate may then adjust based on a preset schedule, as determined by your lender.

The Fixed Mortgage Loan

• Fixed Rate – This means that your monthly payment on the mortgage will not change over time. You can plan, as you have a predictable payment.
• Lower Payment – In this instance when you make a comparison, the monthly payment may be lower than if you were in the variable rate arrangement. There is also less payment of interest in the long run and may be able to have some money left to save for your other goals.
• Interest Rate Risk – If the prime rate falls during the term of your fixed mortgage, then you could end up paying more money in interest here. The person with the variable rate at this point in time will be paying a bit lower interest than you on the fixed rate.

The Variable Rate Loan

• Unlikely To Rise – With a variable rate mortgage, you are not going to pay more than the benchmark interest rate set by your lender. This does not matter how high or how low the prime rate rises. This tends to give you control over your interest rate, than if you were on a fixed mortgage rate.
• Lower Payments – The interest payment on a variable rate mortgage, will change with the prime rate. It may be lower than if you were on the fixed rate mortgage.
• Interest Rate Risk –  If the prime rate declines over the period of your variable mortgage, then you could possibly end up paying a bit more in interest than if you had a fixed rate. This could lead to some extent in a negative cash flow situation

The Choice

One of the decisions which a person will need to make when weighing the fixed rate versus a variable rate loan is the lifetime of the loan or mortgage. Some persons make the decision where if the loan repayment is say 10 – 15 years or less, then it may be more suitable to take a variable rate. On the converse, if the lifetime of the mortgage is over 20 years in payments then it may be wiser to go to a fixed rate.

These types of decisions are best made with the help of a financial advisor or expert. Some may recommend the variable rate loan as an option for lowering your payments. Others may recommend the fixed rate as it may sound a little bit more stable. Overall, you along with your financial advisor will need to work through your financial situation and also goals in the short, medium and long term.