Fixed or Variable Interest Rate?
Should you opt for a fixed or variable-rate mortgage? Each option has its pros and cons. If you’re about to take out a first mortgage or renew an existing one, the question inevitably arises: what formula will be most advantageous, a fixed or variable rate?
Fixed interest rate
A fixed-rate mortgage is when both the interest rate and payment remain the same over the term of the loan. It gives you stability and peace of mind for the duration, and payments do not change until the end of the term. Fixed-rate loans can be open — which means they can be paid off at any time with no penalty for early repayment — or closed which involves a penalty for paying off the mortgage before the end of the term.
Variable interest rate
If you opt for a variable rate, mortgage payments may vary upwards or downwards. If market interest rates fall, more of the payment is allocated to paying the principal. On the other hand, if interest rates rise, more of the payment is allocated to paying the higher interest. The variable rate mortgage is available as either open or closed.
The advantages … and disadvantages
A variable rate mortgage offers great flexibility and can be very advantageous when interest rates are falling. However, rates are volatile and unpredictable and there is the possibility of an increase in interest rates. The fixed-rate mortgage can protect you from this volatility, but will not have any effect on your payments if interest rates drop.
Your preference in this regard will depend on your willingness to accept risk as well as your ability to cope with increased mortgage payments.