I get this question often! Here is a blog dedicated to better understanding the above terms and which options may benefit you best. First of all, let us look at what the differences are between a fixed and variable rate.
- A fixed-rate stays the same for the duration of your term. Your payment amount won’t change.
- A variable rate fluctuates with increases or decreases. This means your interest rate and payment amount can go up or down during your term.
Here is a list of the Pros and Cons of both options:
The Fixed Rate
- Borrowers know precisely what their monthly payments will be regardless of market rate changes.
- Fixed rates do not rise during periods of rising interest rates.
- Borrowers can self-select their time frames for loans
- Loans are less flexible under fixed-rate agreement terms.
- Fixed rates do not fall during periods of declining interest rates.
- Fixed-term fees may incur additional fees should the borrower want to change terms or exit the loan early.
- Fixed-rate loans have historically been more expensive over their life than variable rates.
The Variable Rate
- Loan repayments decrease when interest rates fall.
- Loans typically get better upfront perks, like low introductory rates for an initial loan period.
- The interest rate for a variable loan is generally lower than a fixed loan
- Loan repayments increase when interest rates rise.
- Loans may become more expensive than fixed-rate loans should interest rates rise quickly.
- Borrowers face greater risk if they are overcapitalized or already at repayment capacity.
- Borrowers may be unable to plan or forecast future cash flow due to changing rates.
So, which should I choose, a fixed or variable rate for my mortgage?
This question is ultimately up to you. However, I encourage you to find a mortgage broker or bank you trust to ask these complex financial questions. This is a choice that does matter! Having someone with wisdom and experience in the market on your side will make all the difference. As always, I am here to guide you whenever you need me.