A very important question that most prospective home buyers are faced with is whether to choose a fixed rate or a variable rate mortgage. Fixed rate mortgages come with an interest rate that is determined at the time of taking the loan and remains the same throughout the life of the loan. Variable rate mortgages, on the other hand are mortgages with interest rates that change in line with prevailing market lending rates.
Although many borrowers are tempted to the certainty that fixed mortgages present, a variable rate loan offers many advantages too. In some situations, it can result in significant savings through the term of the loan.
If the current benchmark rates are high, it will not be a good decision to go for a fixed rate mortgage, as you’ll have to keep paying interest at a higher rate throughout the loan’s term. But with a variable rate, your payments will be lowered when the benchmark interest rates fall.
Variable rate mortgages often come with an initial low teaser interest rate to attract borrowers. Generally, this teaser rate will be in force for a fixed period. Home buyers who expect some increase in earnings in the future or are about to receive some funds from investments or other sources can opt for a variable loan with a long enough teaser period. Make sure that the end of the low interest period coincides with the inflow of extra income. You will enjoy low repayments throughout the teaser period. Once this period ends, you can start making higher repayments with your extra income.
If you are just beginning to build your credit or have a poor credit score, then a variable loan will be easier to get. As long as you are able to manage your payments, you will be able to rebuild your credit score so that future loans become cheaper and easier to get.
Lenders usually have a number of variable loan options to choose from with different teaser periods, different initial rates, and other terms. This makes the variable loan more versatile and gives you a much wider range of options to choose from. This also increases the chances of your finding a loan that matches your unique financial needs perfectly.
If you are buying the home for a short period, and the current interest rates are low, you should go for a variable rate loan. Variable rates will be lower than fixed rates, and you can enjoy lower payments in the short term. By the time the interest rate increases, you may have sold the home and repaid the loan fully.
Variable rate mortgages can be very beneficial for borrowers in above and many other situations. During a high interest rate period, a variable rate loan also allows you to keep your options open. If the rates fall in future, the loan will become cheaper. By refinancing at that time, you can easily lock-in the lower rates.