Should I choose a fixed or variable rate mortgage?

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There are several mortgage services available today. Each program has its own set of parameters, one of which is the interest rate, either fixed or floating.

In general, choosing the form of interest rate is one of the most important steps in a mortgage transaction.

Fixed-rate mortgage. 

The fixed interest rate on a mortgage loan – the percentage determined once upon conclusion and for the entire duration of the agreement. This rate, in contrast to the variable rate, is not subject to revision. A fixed rate can be beneficial to both the lender and the borrower because it allows you to plan your income and expenses in advance. At the same time, it does not reflect the situation in the economy, which can change significantly. Only the terms of the loan agreement or the parties’ agreement will cause the fixed interest rate to adjust. To adjust the fixed interest rate, you’ll have to sign an additional contract that modifies the loan agreement’s terms.

Variable-rate mortgage.

Variable interest rate – the rate on loans, the amount of which is not fixed but is calculated according to the formula determined by the agreement. As a rule, it is linked to rates in the interbank market.

Since it is difficult to forecast the value of market indices that are subject to long-term volatility, the borrower who enters into a mortgage agreement with a floating rate assumes a certain danger. In order to understand how the monthly payments on his loan will adjust, the borrower will need to track indicators on a regular basis.

Data on these indicators are normally available on the websites of lenders that offer such loans, as well as some news organizations’ websites.

People who are willing to take on a certain financial risk, are not afraid of a potential rate hike, can easily monitor and forecast rate increases, and understand how to profit from this product use a floating interest rate.

The query ” Should I choose a fixed or variable rate mortgage?” has no exact response.

The situation can deteriorate to the point that the banks and the Ministry of Finance will be able to control inflation, which will begin to fall. As a consequence of the floating indicator, floating rates will fall. Then it will be more cost-effective to take out a floating-rate loan.

However, the opposite can also occur: interest rates will begin to increase, making a floating rate unprofitable because it will be possible to pay at a fixed rate that is cheaper than that determined by the market. In essence, it’s a matter of predicting the future, with the borrower taking on the burden of decision.

Written by Bader Albader, market researcher.