Which is Better Mortgage Fixed or Variable. Choose the Right One

Which is Better Mortgage Fixed or Variable. Choose the Right One
Updated - 2022.03.22

When you are in the market for a house loan, the first issue that springs to mind is whether a fixed-rate or variable-rate mortgage is more advantageous. Options that come with a fixed rate have the advantage of not fluctuating at all over time. As a result, you will work with greater confidence and not face any harm by rising interest rates. If you are concerned about the direction in which interest rates are heading, variable rates may be a better option for you to consider.

Let’s look into the details of what each option offers, including the pros and cons. You will thus gain more knowledge to help you make the right choice.

Which is Better Mortgage Fixed or Variable? 

which is better mortgage fixed or variable

It is vital to look into both options separately before saying with certainty that one mortgage option is better than the other.

Variable rates

When using a variable-rate mortgage, your monthly mortgage payment will be the same during your loan period. Still, the interest rate will fluctuate in response to the prime interest rate changes over time.

However, regardless of whether your interest rate rises or falls, you will continue to pay a similar amount every time you submit a mortgage payment. The difference is in the amount of money applied to the principal and interest. When the interest rate rises, a more significant proportion of each price applies to interest; when the interest rate falls, a more substantial proportion of each payment is put to the principal, allowing you to pay back your mortgage more quickly.

Pros 

  • Over time, this could save money. Variable-rate mortgages are better for you if interest rates stay the same or fall during your term. You’ll pay less in interest compared with a fixed-rate.
  • Break penalties are meager. Most lenders charge you three months of interest if you want to break your variable-rate mortgage contract, but some don’t charge at all.
  • You can switch to a fixed-rate mortgage at any time. Many lenders will let people who have a variable-rate mortgage switch to a fixed-rate mortgage at any time, but not all of them will.
  • A lower initial payment may enable you to get a bigger loan.

Cons

  • Instability. If interest rates go up, you might have to pay more than you’d have if you had a fixed-rate mortgage.
  • Switching might be costly. If you switch to a fixed-rate mortgage, the interest rate will be as per the current rates, which might be higher than when you took out your mortgage.

Fixed Rates

Interest doesn’t change for the whole duration of your term with fixed-rate mortgages. It doesn’t make a difference if interest rates rise or decrease. Mortgage rates won’t change, so you’ll pay the same amount monthly. Fixed-rate mortgages usually have a greater interest rate than variable-rate mortgages since they guarantee that the rate will stay the same.

Pros

  • Stability. Your interest rate will stay constant during the period.
  • Predictability. You’ll understand how much of each monthly payment will go toward interest and principle, and you’ll be able to forecast the duration to clear your mortgage. 
  • It is simpler to comprehend than a variable-rate mortgage.

Cons

  • Costs could rise in the long run. A fixed-rate mortgage will likely be more costly than a variable-rate mortgage if interest rates fall.
  • It would be best if you broke penalties. When you need to terminate your closed fixed-rate mortgage arrangement, some lenders may demand excessive costs if you opt to sell the home.
  • Your interest rate is constant for the duration of your mortgage.

What Type to Choose: Mortgage Fixed or Variable?

The discussion between fixed vs. variable mortgages may seem uncomplicated, but many different factors might affect your decision. Traditionally, fixed-rate mortgages were more prevalent, although variable-rate mortgages have spared homeowners more money much of the time. With such low-interest rates offered in recent years, many people are moving towards fixed rates.

Here are some things to consider before making your choice:

  • Interest rates. Opting for a fixed rate is an excellent approach to lock in your rates whenever you think interest rates will increase. If you believe rates will decline, obtaining a variable-rate mortgage might save you cash.
  • Your risk tolerance. Naturally conserved individuals who don’t enjoy taking chances are better off with a fixed-rate mortgage since the interest rate remains constant throughout the term, and you’ll know precisely the duration it will take you to settle your mortgage.
  • Spread. The spread is the gap between the lowest rates for fixed and variable-rate mortgages. Whenever the distance is enormous, many consumers opt for a variable rate. Whereas if the spread is minimal, a fixed rate can be worthwhile.
  • You could sell your property within the term. Should you ever have to breach your mortgage, you’ll have to pay a fine. Fixed-rate mortgages often compute the penalty using the level of interest you’d incur over the balance of the term, which can be exorbitant. To break your contract, you usually need to pay 3 months’ interest for variable-rate mortgages.

Switch From a Variable-Rate to a Fixed-Rate Mortgage

When renewing your mortgage after your term, you will have the option of changing your mortgage rate type.

Depending on the lender, a variable rate loan may also be convertible to a fixed-rate loan during the loan’s initial term.

Negotiate Your Mortgage Interest Rate

which is better mortgage fixed or variable

You can work out a lower interest rate. As soon as you discover a lower rate anywhere else, contact your lender to see if or not they can replicate it or do even better.

If you have a compelling mortgage application, you will almost always have the most success in negotiating. It includes a substantial down payment and credit history, a steady income source, and a minimum debt service ratio. A greater interest rate may also be available if you already have other products with the lender (for example, insurance, investments, or even a credit card).

Conclusion

Many people focus solely on the statistics when contemplating fixed vs. variable mortgages. However, the situation is more complex than that. It’s genuinely a coin flip when considering an option that will save you the most money at any given time. Consider your risk level and how you’ll react if interest rates rise or fall before deciding.

Fixed-rate mortgages are the best option if you know that your interest rate won’t change throughout your loan. A variable-rate mortgage could be a better option if you’re willing to take the chance on the future direction of interest rates.

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