Navigating The Mortgage Landscape: Fixed Vs Variable Rates

When it comes to choosing a mortgage, or renewing your current one, a decision you’ll have to face is the battle between fixed Vs variable rates and which to choose. Each option has it’s own pro’s and con’s. The best choice for you will depend on your financial situation, market conditions and personal preferences.

In this blog I’ll explore some of the pro’s and con’s of fixed vs variable rates so you can be equipped with the knowledge to choose the right type for you.

Fixed rate mortgages

A fixed rate mortgage does what it says on the tin and your rate of interest is fixed for the term of your loan. This can be anything from 1 year to 10 years.

This type of mortgage has several key pro’s:

• Predictability and stability as your monthly payments will remain the same. You’ll be able to budget easier as you’ll always know how much need to set aside for your mortgage. This can be particularly helpful if you’re planning to stay in your home longer-term.
• You get protection against rate increases. As your interest rate is locked in you’re protected from increases in the market interest rates. This can give you peace of mind, especially with how volatile interest rates have been over the past few years.

We got our mortgage at the start of 2020 and were lucky to get what in reflection was a very low interest rate (around 1.8%). Thankfully we locked our rate in for five years meaning we’re not set to renew until early next year. If we’d locked in for just three years we’d have set to have a massive increase renewing in 2023.

However, fixed rate mortgages also have some con’s:

• They typically have higher initial rates compared to variable rate mortgages, so your initial monthly payments may be higher.
• There’s limited flexibility if the market interest rates decrease. If this happens you won’t benefit from lower rates unless you refinance your mortgage, and this can involve additional costs and fees.

Variable rate mortgages

A variable-rate mortgage, also known as an adjustable-rate mortgage (ARM), has an interest rate that can fluctuate based on market conditions. Your monthly payments may vary slightly, and year-on-year they can be vastly different if base rates of interest change.

This type of mortgage has several key pro’s:

• Lower initial interest rates. Compared to fixed-rate mortgages they often start with lower interest rates meaning your initial monthly payments will be lower.
• You can save money. If the market interest rate decreases your mortgage rate and monthly payments could decrease as well. So you could save money over time.
• There’s increased flexibility. Some variable rate mortgages come with features such as rate caps to provide some protection against rising rates.

However variable rate mortgages also have some con’s:

• The main drawback is uncertainty on your interest rate and monthly payments which could increase, sometimes significantly, if the market rates rise.
• Changes make it harder to budget. Due to constantly changing rates it can make it harder to budget when your mortgage isn’t the same price every month.

Fixed Vs Variable Rates: Choosing the right type

Deciding between a fixed or variable rate mortgage depends on a few factors:

• Your financial stability. If you have a stable income you may prefer predictable monthly payments so you can plan around a set figure.
• Market conditions. Consider what’s going on in the market at the moment before deciding. If rates are low and they’re expected to rise you may want to lock it in with a fixed rate. But if rates are high like they were in 2023 a variable rate may be better.
• Your long term plans will come into play. If you’re not planning to be in your home for a long time then a variable rate may work better to give you lower intital payments. But if you’re in it for the long haul and fixed rates are good then this may be preferable.
• Your risk tolerance will play it’s part. If you’re risk adverse and want certainty then a fixed rate mortgage is a better fit. But if you’re comfortable with some risk and fluctuation then a variable rate may be better.

I will caveat that I’m not a mortgage advisor or financial professional so always put the research in before making a decision.

In the debate of fixed vs variable rates there’s no right or wrong answer. Both have their own pro’s and con’s so carefully look into your options.