When choosing a mortgage specialist and mortgage, a borrower’s first decision is whether to go with a fixed or variable-rate mortgage. Both types of mortgages have pros and cons, and the right choice for one borrower may not be the best choice for another. This blog will explore the differences between fixed and variable mortgages and provide tips for borrowers seeking to make an informed decision.
What is a Fixed Mortgage?
A fixed mortgage is a type of mortgage in which the interest rate remains the same for the entire term of the loan. This means that the borrower’s monthly mortgage payments will stay the same throughout the life of the loan. Fixed mortgages are typically offered with terms of 15, 20, or 30 years.
Advantages of a Fixed Mortgage
There are several advantages to choosing a fixed mortgage:
- Predictability: With a fixed mortgage, the borrower knows exactly what their monthly mortgage payment will be for the entire term of the loan. This can be helpful for budgeting purposes and can provide a sense of financial stability.
- Fixed costs: As mentioned above, the monthly mortgage payments for a fixed mortgage will remain the same throughout the life of the loan. This can be beneficial for borrowers who want to be able to predict their housing costs for the long term.
- Lower interest rates: Fixed mortgage rates are often lower than variable mortgage rates, especially in times of economic uncertainty. This can lead to lower monthly mortgage payments for borrowers who opt for a fixed mortgage.
Disadvantages of a Fixed Mortgage
There are also some potential disadvantages to choosing a fixed mortgage:
- Limited flexibility: With a fixed mortgage, the borrower is locked into the same interest rate and monthly payment for the entire term of the loan. This can make it difficult to adjust to financial circumstances changes or take advantage of lower interest rates if they become available.
- Higher interest rates: While fixed mortgage rates are often lower than variable mortgage rates, they can still be higher than the current market rate. This means borrowers who choose a fixed mortgage may pay more interest over the loan life than those who prefer a variable mortgage.
What is a Variable Mortgage?
A variable mortgage is a mortgage in which the interest rate can fluctuate throughout the loan term. The interest rate is typically tied to a benchmark, such as the prime rate, and can rise or fall based on changes in that benchmark. As a result, the borrower’s monthly mortgage payments can also fluctuate.
Advantages of a Variable Mortgage
There are several advantages to choosing a variable mortgage:
- Lower interest rates: Variable mortgage rates are often lower than fixed mortgage rates, especially in times of economic stability. This can lead to lower monthly mortgage payments for borrowers who opt for a variable mortgage.
- Potential for lower costs: If the benchmark interest rate decreases during the loan term, the borrower’s monthly mortgage payments may also decrease. This can provide some flexibility and financial relief for borrowers struggling to make their monthly mortgage payments.
- Potential for the shorter term: Some variable mortgages offer the option to convert to a fixed-rate mortgage after a certain period. This can allow borrowers to take advantage of the lower interest rates of a variable mortgage while also having the option to switch to a fixed-rate mortgage if they prefer the predictability of fixed payments.
Disadvantages of a Variable Mortgage
There are also some potential disadvantages to choosing a variable mortgage:
- Uncertainty: With a variable mortgage, the borrower is still determining exactly what their monthly mortgage payments will be from month to month. This can make it difficult to budget and plan for the future.
- Higher prices: If the benchmark interest rate increases during the loan term, the borrower’s monthly mortgage payments may also increase. This can be a financial burden for borrowers struggling to make their monthly mortgage payments.
- Higher risk: Variable mortgages come with a higher level of risk, as the interest rate can fluctuate significantly over the loan term. This can lead to higher overall mortgage costs for borrowers who choose a variable mortgage.
Ultimately, deciding between a fixed and variable mortgage will depend on the borrower’s financial situation and risk tolerance. Borrowers who are looking for predictability and stability may prefer a fixed mortgage. In contrast, those willing to take on a higher level of risk in exchange for the potential for lower payments may choose a variable mortgage. It is essential for borrowers to carefully consider their options and speak with a mortgage broker in Vancouver to determine the best mortgage option for their needs.